Bank Branch Audit

BANK BRANCH AUDIT
(2017-18)
AUDIT PROGRAMME
AND BACKGROUND PAPERS
CA. M.M KHANNA CA. SANJAY VASUDEVA

K.C. KHANNA & CO., S.C. VASUDEVA & CO.,
CHARTERED ACCOUNTANTS CHARTERED ACCOUNTANTS
GOBIND MANSION, B-41, PANCHSHEEL ENCLAVE,
H-96, CONNAUGHT CIRCUS, NEW DELHI-110017
NEW DELHI-110001
NORTHERN INDIA REGIONAL COUNCIL

(The Institute of Chartered Accountants of India)
BANK BRANCH AUDIT 2017-18
Section Index to the Background Material Pages
I NOTE ON BACKGROUND MATERIAL 1-18
II PRELIMINARY WORK
A Letter to Branch Management (Audit Engagement/ initial letter seeking 1 -2
information/management representations)
Annexure to Letter
I &IA Information/Requirements in connection with the audit 3-18
II Information on Advances 19
III Observations/Status Review on Major Advances accounts 20-30
III.1 Major Advances Accounts – Compliance of Terms and Conditions of 31
Sanction
III.2 Key Financial Indicators for the last two completed years and projections 32
IV Restructuring in Borrowal Accounts and formats 33-36
V Stressed Assets Disclosure requirement formats 37
VI Statement of Overdue Deposits 38
VII Entries originating prior to but responded after 31-3-2018 39
VIII LFAR Requirements Deserving Special Attention 40
IX Branch Data for the 12 Odd dates for SLR 41
B Text of letter suggested for being addressed to the Branch (year-end) 1
III AUDIT PLANNING / PROGRAMME / EXECUTION
C Branch Audit Programme and Guidance
C Branch Audit Programme 1-35
C1 Advances requiring special attention 36
CII Common Irregularities/Adverse Features in Advances 37-40
CII.1 Observation/Status Review of major advances accounts 41
CII.1.1 Summary of Adverse observations on advances accounts (Illustrative) 42
CII.2 Summary of Adverse features in advance accounts 43
CII.3 Form of MOC relating to advances 44
CIII Audit in EDP Environment 45-48
CIV Summary of Advances of the Bank (for information) 49-50
CV Asset-Liability Management (ALM) 51-60
CC Branch Management Representation to Auditors (Illustrative) 1-6
IV REPORTING
D Form of Branch Auditor’s Main Report to the Statutory Auditors 1
D.1 Nationalised Banks -As per Guidance of ICAI (Latest edition) 2-3
D.2 - As recommended by authors 4-6
D.3 Banking Companies- As recommended by authors 7-12
D.4 Qualifications/Observations(Illustrative) for incorporation in the Report 13-26
D.5.1.1 Form of MOC relating to Advances 27
D.5.1.2 MOC affecting Advances/Classification 28-29
D.5.1.3 Recommended format for MOC (other than Advances) 30
D.5.1.4 Format of List of advances Accounts for which interest calculations have 31
been checked
D.L.1 LFAR Questionnaire and recommended action for Reporting 32-55
D.L.2 Recommended additional matters for LFAR 56-58
D.L.2.1 Manner in which certain matters may be considered in LFAR (Illustrative) 59-64
V REFERENCE MATERIAL
E & E I RBI Norms on Income Recognition, Asset Classification and Provisioning 1-34
(2017-18) – Summary
E.II Reckoner for Categorisation of Advances 35- 37
E.III Provisions Required based on categorization of Advances Accounts 38-46
E IV Other Clarifications on Advances 47-62
F Accounting Standards (ICAI) 1
F.I Indian Accounting Standards (IND ASs) 2
F.II Standards on Auditing (SAs), Review (SREs) and Other Standards (SAEs/SRSs) 3-4
G Internal Controls and Risk based Audit approach 1-4
H Broad Analytical Procedures 1
I List of Important Circulars of Reserve Bank of India ( 1-7-2015 to 12-2- 2018) 1-6
J Broad Guidance on extended scope of work re: Frauds 1-30
K, K.1 Disclosure Items for Banks & Detailed Balance Sheet disclosures 1-21
L Recommended form of the certificate-Ghosh and Jilani Committee 1
M Important provisions of the Banking Regulation Act, 1949 1-5
N Abbreviations used in the Banking Industry (RBI) 1-9
O Manner of computation of interest accrued on FCNR(B) deposits 1-2
P Computation of Drawing Power in facilities against stocks and debtors 1-2
Q Gold Monetisation Scheme – Brief Note 1-6
R Trade Credits for Imports in India – Brief Note 1-2
S Peer Review Confirmation 1
Bnkaud18.sanjay v & mmk

BANK BRANCH AUDIT (2017-18) - BACKGROUND
Bank Managements ensure that all transactions and events, relating to the accounting period, are
duly and faithfully recorded accurately and are complete; and further, that the year-end account
balances truly represent assets and rights (in existence and with beneficial ownership), liabilities
and obligations of the bank. Such financial statements include assertions (implicit and explicit)
related to the recognition, measurement, presentation, and disclosure of the financial information
contained therein in accordance with the applicable statutory, regulatory (directives and
guidelines) and the related Accounting Standards / Indian Accounting Standards (translated into
significant accounting policies), as also the compliance of other applicable laws having effect on
the financials. To ensure uniformity in approach in the preparation of the financial statements, the
bank managements encourage the issue of periodic, and period end, internal instructions pursuant
to the above, which instructions are expected to be followed by all offices, branches, sections and
departments of the bank to enable offices/branches to prepare their financial statements
accordingly.
With extensive use of technology and its continuous evolution in a dynamic and changing
environment, customers of the Bank have the advantage of expeditious and convenient anytime-
anywhere-banking, based on their access on real time basis, to their information / data, stored in a
safe and secure environment on the bank’s servers. With the ever increasing number of customers
having access to Internet and mobile connectivity, monetary transactions from inception to finish
have become expeditious through E banking; and, due to Core banking technology and extensive
advancements therein banks have achieved phenomenal and accelerated growth, and are able to
venture into, and continuously offer, a wide range of innovative products and services to their
customers. Transactions in banks are not only voluminous, but originate also from outside the
branches. Though the RBI has desired that banks ensure that all information relating to
transactions of the branches be captured and built into the centralized system, in reality it may not
be practically possible; and necessarily, there are areas of manual intervention, particularly where
discretionary charges at the Branch are leviable e.g. godown and other inspection charges, penal
interest chargeable due to non compliance of bank’s requirements, stock audit fees, insurance
charges, locker rentals, loan processing fee, bank guarantee renewals etc. It is imperative that the
auditor enquires into areas where the Branch needs to originate entries which are not covered by,
or to supplement, the centralized system. The system of capturing the economic event/ information
/ data, and integrity thereof needs to be optimally maintained at all stages from origin, recording,
transmission and storage; and the control systems that ensure that the same is free of risks of
errors, omissions, irregularities and frauds. Considering the challenges of technology, bank
managements continuously endeavour to focus on the internal control systems to ensure that they
are robust, safe and secure and risks are minimized.
An audit involves an objective independent examination of the financial statements of the banks
that enhances their value and credibility based on whether management’s assertions as to
recognition, measurement, presentation, and disclosure of the financial information contained
therein can be supported by facts and evidence. The purpose of such audit is to express an
opinion, and provide a reasonable assurance as to whether or not the financial statements are
presented fairly, in all material respects, that there are no material errors or misstatements and,
besides complying with the statutory and regulatory impositions, give a true and fair view in
accordance with the financial reporting framework.
Given the severe time constraints for the auditor to complete the bank branch audit exercise and
furnish his report as per the applicable auditing and assurance standards, it is imperative that he is
equipped with thorough knowledge of the relevant statutory and regulatory impositions for the time
being in force, the applicable Accounting Standards / Indian Accounting Standards, and has the
requisite expertise and skills to ensure timely execution of the audit assignment as per a
systematic plan. The work performed needs to be well documented to enable him to support his
audit opinion within his reporting responsibilities.
Bnkaud18.sanjay v & mmk 1

To meet the objective of the preparation of a meaningful, effective and qualitative report, the audit
procedures, would include audit planning based on the auditor’s understanding of
 scope of his assignment,
 manner in which economic events and transactions are recorded (origin and source),
 how the related data integrity is maintained / preserved (including in transmission) and
protected from origin to the very end ( whether with or without manual intervention),
 the fraud and risk management, through internal control systems and procedures so as to
address inadequacies, if any therein and, an assessment of the gravity and degree of the
perceived/assessed risks,
 the existence and effectiveness of the monitoring and supervisory mechanism prevalent, and
 the nature and extent of material adverse features, if any reported in the internal monitoring
and supervisory reports and compliance or otherwise thereof.
Banking operations are conducted only at the branches, while other offices act as controlling
authorities or administrative offices that lay down policies, systems and internal control procedures
for conduct of business.
The auditor needs to understand the scope of the assignment and the terms of engagement to
enable him to plan and perform so that all requisite reports/attestations are furnished within the
severe time constraints without, however, sacrificing quality.
Beyond the scope of the statutory audit and furnishing a report pursuant thereto, RBI requires the
banks to obtain, in response to a questionnaire in a structured format, a Long Form Audit Report
(LFAR); and the banks also appoint the auditors to conduct an audit under Section 44AB of the
Income tax Act 1961 and issue a Tax Audit Report as also issue certain validations /certificates
The execution of the assignment as per the audit plan would involve obtaining, and consideration,
of the requisite internal and external evidence as necessary, seeking sufficient appropriate
information/ explanations/ evidence, documenting queries/audit observations and notes on
exceptions and other related issues by nature and quantum, seeking and testing management
representations, having relevance to, and for the purpose of, reporting in the manner required.
It is relevant to state that the centralized system in Banks is expected to incorporate all the
required statutory, regulatory and accounting norms and the same being constantly
reviewed / updated so that the statements generated, based thereon show a ‘true and fair
view’. The system generates on a daily basis, a ‘Daily Exceptional Report’ that needs
Branch Manager’s consideration and compliance. This is pertinent information in audit
verification procedures and must not be ignored.
The objective of the background/reference material is to enable branch statutory auditors to be

equipped with the basic knowledge and skills to ensure that the audit assignment is undertaken
and completed expeditiously and in the manner expected. It is relevant to state that the auditors
are expected to follow the Standards on Quality Control (SQCs) and maintain their working papers
(documentation) in evidence of the performance of their audit procedures (reference may be made
to the Audit Review and Other Standards referred to hereinafter).

The audit exercise should involve the following:

S. No. Particulars Remarks
1 Preliminary work/ familiarization exercise:
To effectively and expeditiously carry out the audit
at the Branch level, each member of the audit team,
is expected to be familiar with:
a) Banking Regulation Act 1949 For important provisions

The above is also in line with SA 250 -Consideration refer Section M
of Laws and Regulations in an Audit of Financial
Statements
b) Legal requirements applicable to the particular
bank (banking company, nationalized bank, State
Bank of India, Co-operative bank, Regional Rural
Bank, etc.), particularly as regards financial and
other disclosures and the audit reporting
requirements.
c) Publications of the ICAI, particularly the following:
i. Guidance Notes on Audit of Banks (see Latest
edition); Tax Audit under section 44 AB of the
Income tax Act, 1961 (since Tax Audit is also
covered by the scope of assignment).
ii.Accounting Standards, Indian Accounting Refer Section F, F I, F II
Standards (IND AS), Auditing, Review and
Other Standards.
Audit procedures need to be performed based on

knowledge, and in compliance, of the mandatory
Standards on Auditing and attention is also drawn
to the following:
 Risk Assessment and Response to Assessed  SA 315 Identifying and
Risks Assessing the Risks of
Material Misstatement
through Understanding
the Entity and Its
Environment.
 SA 330 The Auditor’s
Responses to Assessed
Risks.
 Standards on Auditing on Audit Conclusions  SA 700 Forming an Opinion

and Reporting and Reporting on Financial
Statements.
 SA 705 Modifications to the
Opinion in the Independent
Auditor’s Report.
 SA 706 Emphasis of Matter
Paragraphs and Other Matter
Paragraphs in the
Independent Auditor’s
Report.
d) Auditor’s responsibilities in relation to frauds/ Refer SA 240 -The

fraudulent activities. Auditor’s Responsibilities
Refer RBI Master Directions on Frauds issued under Relating to Fraud in an
Section 35 A of the Banking Regulation Act, 1949– Audit of Financial
Classification and Reporting by commercial banks Statements and also
and select FIs, as per Circular Section J.
DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated
July 1, 2016; and in case of banking companies,
read with Sub sections (12) and (13) of section 143
of the Companies Act 2013, dealing with the powers
and duties of the auditors as to reporting on frauds.
e) Regulatory requirements. guidance/directives, Refer Section I for circulars
including Master Directions/Circulars, issued by issued during the period
the Reserve Bank of India (RBI) to banks, (as from 1-7-2015 to 12-2-
available on the RBI Website, www.rbi.org.in), for 2018, together with the
the conduct of banking business/operations, earlier ones that have not
including those having relevance to the preparation been changed (The RBI
and presentation of the financial statements. Circulars are hyperlinked).
These directions/circulars consolidate and
update the earlier circulars and provide updated
regulatory guidance/directives, on matters of
relative importance. Refer also to other such
circulars issued thereafter.
Refer Section K and K.1

Disclosures required by way of Notes in the financial
statements of banks in line with the existing RBI
Correct and complete
Master Circular DBR.BP.BC No.23/21.04.018/2015- information / data is to be
16 dated July 1, 2015, as also applicable to the year
furnished by Branch
2017-18 and also
Management for audit
DBR.BP.BC.No.63/21.04.018/2016-17 dated April verification and further
18, 2017; to the extent applicable to the branch.
consideration thereof at the
RBI directives, generally pursuant to the legal centralized level.
impositions, are mandatory for compliance by banks
and the non compliance thereof would invite audit
qualification by the auditors. RBI’s (regulatory)
guidance to banks is persuasive in nature and is
expected to be followed by the banks and non
compliance thereof by banks would not be the
subject of audit qualification unless it is in conflict
with the audit reporting responsibilities of the
auditors.
f) Questionnaire prescribed by RBI for Long Form Refer
Audit Report (LFAR) relevant to the bank Section D.L.1 for
branches, as also the additional information required Questionnaire and
to be given for large and specialized branches. The recommended action for
reporting,
responses (to the questionnaire), as prepared by
Section D.L.2 for additional
Branch Management, are required to be matters recommended to be
checked/reported upon by the branch auditor; and included in the LFAR
reference may be made to instructions/guidance as Annexure VIII - Section A for
given in a tabulated form for each question. matters deserving special
attention as listed in the letter
to be sent to Management.

g) Knowledge of the nature and type of branch

operations in banks and systems and
understanding of the procedures followed in
banks to record information/data on the basis of
the origination and source of the transactions
and the auditor’s knowledge , experience and skills
to access the records and supporting evidence.
A general understanding of the computerized
environment in which banks work (centralised -
using Core banking solutions as also other platforms
for processing information at the decentralized level)
Of the two main assets in banks, viz., Investments
and Advances, the bank branches deal only with the
latter in terms of classification (for provisioning),
based on their health status, and income recognition
being considered in respect of advances considered
as “performing”. The major heads of expenditure at
the branch comprise Interest on deposits and Staff
Remuneration.
h) Understanding the manner of accounting and This has effect on the audit
preparation of statements verification procedures.
In the manually maintained accounting era as also in
times when branches were automated, accounts at
each office/branch were maintained with physical
access to books and records, based on the slips
generated and validated at that office and based on
supporting evidence available at the Branch.
Information inflows from/to other branches/offices
were recorded through the Inter-branch/Head office
Account. The originating evidence in support of the
transactions as recorded was maintained and was
available be produced for audit verification; and in
respect of entries (Inter branch items) originating at
other branches/offices, usually the reports contained
a disclaimer in the audit reports.
In the core banking scenario, data of the bank is
stored on a central server and accounts of the
branch per se do not exist.
Entries in a branch are initiated and posted from The Auditor is reliant on the
any of the three sources, viz., by the branch system driven information /
personnel, by the system or by personnel from data and cannot verify
another office. Entries could also originate original evidence when
externally from another bank or agency. entries are posted from
Financial statements of a branch depict the data elsewhere and transactions
based on a key relating to the branch. Several do not originate at the
initiatives in delivery of technology enabled existing Branch under audit. He also
and new products and services and make the cannot be certain that the
customers’ banking experience simple, convenient validations of the
and hassle-free – with several value additions centralized information
made under Internet Banking and Mobile system and whether all
Banking. Customers can download, register and statutory, regulatory and

activate their app without visiting a Branch or ATM accounting norms /

and, amongst others, have access to and ease of impositions for the time
banking facilities such as, being applicable are
 Online loan application and tracking incorporated in such
system system. He has no option
 Facility for opening online SB accounts (for but to disclaim his
domestic and NRI customers) responsibility for
information that cannot be
 Automatic Account Opening through e- verified by him.
KYC
 e-passbook being offered in regional
languages in all mobile (Smartphone)
platforms
 mobile app for cardless and cashless
transactions across variety of merchants (
with 2-factor authentication enabled for
customer convenience and safety for flight,
bus ticket booking, DTH Recharge and a
wide range of bill payments).
 Missed call to specified numbers to know
account balance for domestic and NRI
customers and to know last few transactions.
 Bill payment facility enabled for corporate
and specified customers.
 Foreign Inward Remittance facility
 Biometric authentication introduced, say for
locker access.
 SMS Alert for SWIFT transactions and
large transactions and balances
 RD closure facility enabled services.
 New Card variants to cater to the
requirements of different segments of
customers, International Travel Prepaid Card
in foreign currency with multi currency wallet
for the convenience of foreign travellers,
special Business Debit Cards etc.
 Facility to subscribe to the Social Security
Schemes of Govt. of India
(Branches, ATMs and Internet Banking).
 Digital Life Certificate – to convenience
payments to Pensioners for payments
without their physical presence at the branch
 Specialised services, MSME Consultancy
Services - ‘Make in India Campaign’ services to
promote manufacturing sector through credit and
other supporting measures.
 Knowledge Dissemination Centres, as
initiatives, to help customers in different segments

i) Figures in the year end financial statements To account for any

(based on books as closed as at the year-end anderrors/omissions/non
upon completion of the day/month/year end recording of transactions
procedures), leave no scope for any changes pertaining to the year etc.,
therein at the branch level. Branch Management entries and adjustments
should make available for audit verification, all the
recommended through
Branch returns / statements / schedules (and notMemorandum of Changes
merely the Balance Sheet and Profit and Loss (MOCs) forming part of the
Account), duly stamped, signed and dated by the report of the auditors, are
authorized officials). considered at the
controlling office/head
office.
j) Familiarity with Terminologies used in the Refer Section N - for
Banking industry. abbreviations used by RBI
in its notifications/
circulars/directives).
On acceptance of the assignment, the following action needs to taken by the auditor:
k) Issue of Audit engagement and Letter seeking i. Refer Section A -
information: Communications, including seeking together with requisitions
information from the Branch Management must as per Annexures I, IA,
be sent, on the letter head of the firm: II, III, III.1, III.2, IV, V, VI
i. Upon appointment - Audit engagement / and VII, VIII - soon after
Letter seeking information / Management acceptance.
Representations.
ii. For year-end verification procedures ii. Refer Section B
The recommended text is intended to save time and such communications (self explanatory) are sent
to the Branch, as to the engagement which also covers the basic minimum requisitions on
information, explanations and management representations that would be necessary in connection
with the audit. This initial requisition as per the recommended text can be and further supplemented /
modified / strengthened by any other additional requirements due to matters / issues in the specific
knowledge of the Branch Auditor (due to his past association with the same branch / bank’s affairs /
operations) or otherwise in the course of audit as it progresses), including further clarifications on
responses that may be inadequate.
l) Circulars issued by the Bank’s Head Statutory impositions as
Office/Controlling Authority, to the branches/ well as regulatory
offices of the bank, need to be accessed/reviewed. guidelines/directives of the
These Circulars are expected to be in line with the RBI override any
instructions to the contrary
statutory and regulatory requirements and provide
contained in the bank’s
necessary guidance/ instructions that are mandated internal circular
to be uniformly followed by the branches/offices instructions; and non
from the effective date(s), particularly the Bank’s compliance of the ICAI
instructions relating to closing of accounts at the impositions and statutory
year end. compliances would
necessitate qualified
reporting. Other non
compliance of internal
instructions/guidelines
would need to be brought to
the notice of Management
preferably through the
LFAR.

m) Significant Accounting Policies of the Bank, The auditor should

expected to be in line with the applicable Accounting enquire and report any
Standards/Indian Accounting Standards, need to be change in the Bank’s
sought and reviewed to the extent applicable to the accounting policies since
branch. the earlier year, together
with the effect thereof on
the financials of the
Branch, due to change , if
any.
n) Previous/latest reports on the audit of the branch Refer Section A Annexure

as also in connection with the monitoring, I, Para 1 for list of reports.
supervision of activities and operations of the
branch, and compliance of the observations
contained therein, need to be reviewed, to check
compliance.
@
Branch auditors need to be aware that in supercession of the guidelines on 'concurrent audit system in
commercial banks' earlier issued by it (vide circular DOS.No.BC.16/08.91.021/96 dated August 14, 1996 ), RBI
had issued Circular DBS.CO.ARS.No. BC. 2/08.91.021/2015-16 dated July 16, 2015, setting out the scope and
coverage of concurrent audit system in commercial banks. The revised instructions are set out in Annexure I
to that Circular; and Branch auditors need to be aware that there is a prescription for a Minimum Audit
Programme for Concurrent Audit System in Commercial Banks as per Annexure II. Arising out of the
Concurrent audit reports, if the auditor observes that the Bank has not modified its scope of concurrent audit ,
the same needs to be also dealt with in the LFAR, as much as consider any adverse observations in such
reports.
Review of the “handing over charge report” in case A review of the said
of a change of the branch incumbent wherever reports will enable the
there is such a change, as it may contain branch auditor to
information on certain matters like health of comprehend the nature,
advances, status of reconciliations, nominal thrust and volume of the
accounts or other features at the branch that may branch business, the
have effect on the Audit Planning and Reporting. types of errors/
omissions, irregularities
and defaults, if any, in the
past and the compliance
levels etc. so that the
audit risks can be
assessed and addressed
in the audit planning.
o) Calendar of Returns maintained by the Branch:
This will enable an understanding by the auditor, of
the nature of the returns from the branch to various
authorities and level of compliance/discipline by the
branch on returns that have relevance to his
reporting responsibilities.
p) Basic Analytical procedures that may be Refer Section H
adopted (SA 520), based on the initial review of the
financial statements.

q) Information on Advances:
Provisions for doubtful advances are required to be Auditors need to be
made to the satisfaction of the auditors. Verification conversant with the related
of the advances portfolio at the Branch is of relatively RBI Circulars, particularly
high priority. This involves exercise of judgment to the Master Circular (covering
determine the health status of advances, their bench-marked norms
classification (Standard / Sub standard / Doubtful / prescribed {RBI Master
Loss) as per the applicable prudential RBI income Circular (DBR.No.BP.BC.2/
recognition and asset classification (IRAC) norms. 21.04.048 /2015-16) as well
Such classification will determine the quantum of as the one relating to
minimum bench - marked provision for estimated statutory and other
losses as a prerogative and responsibility of the restrictions on advances
auditors which overrides that of the management. (DBR.No.Dir.BC.10/
Classification is borrower - wise. Certain 13.03.00/2015-16), both
exceptions to the general principle of borrower-wise dated 1-7-2015}.
classification pursuant to which, facility / account-
wise rather than borrower-wise classification may be For summarized provisions
relevant (consequent upon concessions / relief due refer Section E
to restructuring, rehabilitation, re-phasement,
nursing, etc. in projects under implementation, BIFR Subject to specific stipulations
cases, infrastructure lending, refinanced projects and to the contrary by RBI, Income
others covered by special dispensations/change in is recognized/accrued on
management etc.) accounts being Performing
advances (generally classified
The internal classification will also determine
as ’Standard’) while in the Non
recognition/ derecognition /non recognition of Performing Accounts
revenue. (classified as ‘Sub standard’,
Bank records must be kept updated on the ’Doubtful’ or ‘Loss’), it is based
unrealized /unapplied income, otherwise on actual recovery /
contractually due in respect of non performing realization.
advances. Accepted principles of
accounting for appropriation of
The manner of appropriation of recoveries in recoveries as income, warrant
non performing accounts, where there are no that priority be given to
unrealized charges, interest
instructions from the borrower must be understood.
and then towards principal.
2. Audit Plan/procedures:
(Attention is drawn to SA 300 Planning an Audit of Financial Statements)
a) Internal controls:
Audit planning warrants an understanding of the Refer Section G
banking business/operations and an assessment of
the audit risks, so as to determine the nature, timing
and extent of the audit procedures. The audit staff
must be familiar with internal control procedures or
absence/inadequacy/breach thereof; and must keep
in view the consequential audit risks, that warrant
extending the audit procedures.
b) Based on the nature and thrust of operations, nature of
adverse features, level of compliance of previous reports,
and audit risks based on lack of, inadequacy in or breach
of internal controls/ discipline and the familiarization
exercise carried out, an audit plan is drawn up.

c) Audit Programme:
Considering that transactions in a bank branch are Refer Pages 1-35 in
voluminous but repetitive, it is appropriate to carry Section C.
out the procedures head-wise as per the financial
statements, giving due importance/priority to
relatively significant matters/items. For this reason,
the Bank Branch Audit Programme is drawn up
head-wise.
In conducting the audit, the auditor must keep in Refer Section G
view the risk based approach. In depth Audit of The Audit Programme
the transactions examined throws light on recommended should not be
compliances as well on accuracy / completeness. taken as rigid and inflexible
and must be extended to
Risk based audit approach, can be adopted,
incorporate therein (in the
based on a Risk Matrix, so that the procedures may space provided under each
be extended in areas where the risk is higher. head), additional procedures
In confirmation of the work completed, the audit staff to cover areas of
must sign against the relevant item of the weaknesses in the system,
programme immediately upon conclusion of each audit risks perceived, as also
part of the assignment handled by him; and if any based on adverse matters that
part is not applicable, it must be so indicated by come to light as the audit
stating “NA.” progresses; and any such
additional procedures that
become necessary should be
documented.
Heads for which no figures appear in the Branch Statements, may yet be relevant and
important for an understanding of the nature and type of activities and flow of information
from the branch to the centralized office for the preparation of the Bank’s financial
statements; e.g., recording at a centralized level, fixed assets acquired/used at the branch,
issuance of drafts that are not controlled at the branch level etc. The Audit Programme,
therefore, covers such items.
The recording of the execution of the work should also be reviewed by the Partner in charge,
to ensure that no part of the work is left out.
Centralisation and physical location of original

loan documents at Loan Processing
Centres/Cells.
There is a propensity in banks to process the loans and It is appropriate to require
advances, including appraisal, sanction, execution of the Branch to enable
documentation, initial disbursements etc. at Loan access to the centralized
Processing Cells/ Centres/ Offices (by whatever name records as required for
called) and to have physical custody/ control over and
verification.
hold all the original documents at such locations; and
such locations may not be in close proximity to the
branch, where the borrowers’ accounts are
maintained/serviced. The Branch places reliance only on
the Sanction letters/ authorizations concerning the
operations in the borrowers’ accounts, on the
presumption that all the required documentation and
formalities are valid and complete at the centralized
location. The Branch also relies on information on the
drawing power/limits as communicated by such Offices.

In the absence of the original documents (or even authenticated copies thereof), on an
updated basis, the audit verification process would get tardy, as the files identified for
examination by auditors would become available only on specific request.
Branch auditors must be satisfied that the terms of the sanction and other communications
on borrowers’ accounts to the Branch are authenticated (particularly if these are computer
generated), and complete and duly updated, for all accounts where the sanction was so
conveyed; and further whether the number of accounts and amounts recorded at such
centres / offices, tally with the corresponding data at the branch. It is necessary to verify that
all cheques/instruments, held by such centres/ offices are banked to provide clinical purity to
the outstandings at the branch.
The Branch auditor must call for reports of the monitoring / supervisory authority (Inspection
/ Concurrent Audit) in relation to the advances operated at the branch, to deal with any
adverse observations therein, including on the appraisals, sanctions and documentation
aspects at the centralized location.
In nutshell, the control aspects are important and may be a major audit risk, if
ignored.
3. Execution of the assignment/ Signing of annual financial statements:
a) General:
Since the figures and information get frozen and become final at each day end, the
auditor may, as the very first procedure, check and ensure that the statements are in
agreement as at the year-end with the books, and the returns as finalised and
authenticated by the branch management can be countersigned by the audit firm
with the remarks “SUBJECT TO AUDIT REPORT”.
In the EDP environment, the auditor should also look into the entries relating to
the day end/month end/year end procedures and provisions/adjustments required
to be made at the branch level, before the branch statements are finalized and the
figures finally crystallized.
The audit staff must record under their signature (on the inverse side of each
statement/detail), the date on which each statement is actually received, in evidence of
the actual delivery of the relevant statement by the Branch.
The date of delivery of each statement (hard copy) to auditors should be countersigned
by the Bank officials notwithstanding that on the face of the statement, the date is
different (usually the year-end date). This will explain the delay, if any, in the preparation
by the Branch of the statements and consequently, completion of the audit exercise.
b) Overview of the financial statements:
It is recommended that a comparison be made of the current year’s figures in the branch
financial statements with the corresponding comparative figures of the earlier year to see
if there are any unusual or large variations that need to be enquired into /verified; and
any unusual significant items, new heads of accounts, or prima facie, any divergent trends
(advances and interest income; and deposits and interest expended) that may need to
be covered in the audit procedures.

c) Examination of the daily exception reports, both This is on the presumption

as regards systems and transactions assumes that all the required /
significance and can be a source of critical applicable norms have been
inputs into the reports. built into and updated into
the system.
The exceptions can be the
source information for audit
verification / reporting.
d) Areas deserving special attention:
While examining the financial statements, due importance needs to be given to all heads
of accounts, based on the audit risk attached thereto.
i.i. Advances:
Examination needs to be made, of the borrowers’
accounts to determine their appropriate internal
categorisation as per the applicable prudential
norms. For this purpose, attention needs to be paid
to:
Prudential Norms made applicable by RBI (Master Refer Section E for
Circulars/directions by RBI). important circulars
Selection of accounts for audit coverage: Reference may be made to
Selection of advances accounts must be made to the manner of selection of
give priority to examination of critical / adversely advances (Section C I /
commented accounts and coverage of a Section A Annexure IA),
representative number and quality of the portfolio. which inter alia includes
each large borrower
(where the outstanding
amount is in excess of 5%
of the aggregate advances
of the branch or Rs. 2 crore,
whichever is less), for which
information is
recommended to be
obtained in a structured
format (Refer Section A
III). This will not only cover
the reporting requirements
of the LFAR, but also serve
the purpose of incorporation
in the Main Report, of any
observations that affect
classification/income
recognition and provisioning
in such accounts. In
response to the LFAR
questionnaire, such form
duly completed for each
large borrower (by the
branch and verified by the
auditor), could be annexed
to that report.

Advances under Restructuring, rehabilitation,

rephrasing, rescheduling, nursing etc.
Banks can restructure borrowers’ accounts Provisions must be
classified under 'standard', 'sub- standard' and considered for such
'doubtful' categories to provide relief and bear advances where the
sacrifice in case of accounts in distress or those not proposals are pending
capable of being serviced on the terms and disposal as at the year-end.
conditions contractually stipulated. The Auditor is
expected to be familiar with the regulatory
impositions/ guidelines and their faithful compliance
by the bank in this regard, as also exercise
judgment as to the appropriate classification status
emerging from the approved cases and those
pending at the year end. In such cases, provisions
at the bench-marked norms including for the bank’s
sacrifice in present value terms
(DBR.No.BP.BC.27/21.04.048/2015-16 July 2, 2015 -
Discount Rate for Computing Present Value of Future
Cash Flows), would constitute total provision.
Upgradation of bad and doubtful assets in the banks,
contrary to RBI prudential norms, helps banks to
reduce the level of non-performing assets (NPAs),
largely driven by restructuring in accounts, in the
garb of preservation of the economic wealth in case
of units considered viable. If such cosmetic application
is devoid of realities and involves attempts to evergreen
the accounts that are intrinsically weak, the auditor, in
exercise of his prerogative, can ask for an adverse re-
classification of the health status of the borrowal account
warranting appropriate provision.
Computation of Drawing Power:
One of the often debated issues relates to the Refer Section P, as to the
computation of Drawing Power and limits that are to be appropriate method of
adhered to in case of cash credit and overdraft advances computation.
accounts involving primary security by way of stocks and
debtors, (including that computed by other banks as
leaders in consortium, and communicated to the branch
being audited).
ii. Accounts maintained in EDP environment:

The audit staff must be familiar with the systems and procedures adopted by the Bank and
determine the extent to which computerization/mechanization has been made. Updation of the
systems and in parameterisation from the effective dates as may be warranted due to
new/modified impositions, at the instance of the RBI or otherwise, need to be checked. Manual
intervention to System generated statements/information, needs special attention of the
Auditor; and he needs to also incorporate additional procedures, if any, in the Audit
Programme, in areas where manual intervention is made.
iii. Nominal /transitory heads of account
Extensive use of such heads increases the risk of errors and frauds, particularly if there
are long outstanding or large items that remain parked in such accounts. These need to
be examined to ensure that there is no risk of any loss requiring provisions.

e) Interest Income/Expenditure: Questions are often asked

The auditor should look into unusual / large debits in on the method of
income accounts, to ensure that these have arisen computation of interest
due to genuine reversals required, including on accretion on FCNR (B)
account of Interest Suspense in NPAs identified deposits. Reference may be
during the year or due to wrong computation of made to Section O.
interest earlier recorded.
Similarly, attention needs to be paid to credits in the
expenditure heads.
f) Additional responsibilities in relation to Refer Section J.
Frauds/fraudulent activity etc. It is appropriate that full
Attention is drawn to sub para 4.2.9.(ii) specific to provision be made by the
provisioning norms in respect of all cases of fraud year-end irrespective of
as per RBI Master Circular on IRAC norms formal reporting to RBI as
(DBR.No.BP.BC.2/21.04.048/ 2015-16 dated July 1 the loss is established.
2015), which requires that the entire amount due
to the bank (irrespective of the quantum of security
held against such assets), or for which the bank is
liable (including in case of deposit accounts), is to
be provided for over a period not exceeding four
quarters commencing with the quarter in which the
fraud has been detected;
However, where there has been delay, beyond the
prescribed period, in reporting the fraud to the
Reserve Bank, the entire provisioning is required to
be made at once. Such cases need full provision till
the year end.
g) Management response to the audit
requirements/Management representations:
The management responses to the queries Illustrative Management
made must be specific and in writing. (SA 580). representation letter to be
Management response / compliance to the audit addressed to the Branch
requirements / information initially sought must be Auditor by the Branch
obtained from the Branch simultaneously with management is given in
receipt of the first set of statements, to enable the Section CC, and should
information / explanations to be examined / tested form part of the Audit
for veracity thereof and considered for the purpose working papers.
of the auditor’s report(s). Circumstances may warrant
additional representations
to be obtained based on
requisitions initially made
and in respect of
information further sought in
the course of audit.
Any general / cryptic reply
from the Branch
Management should not be
acceptable and would not be
a reasonable / adequate
response.

If Management representation / Response is In preparing his report, the

not received, a letter should be addressed to the Auditor needs to take a view
Branch Management binding them on the on non receipt of response to
information furnished or representations otherwise the requisitions or any part
thereof, any
made during the audit.
misrepresentations by
management or any reply
contrary to facts, or in case
the Bank proclaims having
given information which is
actually not furnished, or if
given, it is found to be
inappropriate / incorrect. Any
limitations/restrictions on the
duties /responsibilities of the
auditor must also form part of
the Main report and may
warrant a disclaimer.
Lack of/ casual response
from the Branch must also
be reported in the LFAR.
The above-mentioned
procedures/work papers and
work done by the audit staff
needs to be evidenced on
record, as it would also be
required for Peer Review of
the audit firm.
h) Observations/Notes/Comments for the purpose of reporting:
The audit notes/observations/work papers and evidence of work done should be
retained in the audit file, duly indexed and easily accessible for reference; and
preferably in the same sequential order as that of the programme, together with
Management representations. This will enable expeditious completion of the
assignment and furnishing of reports.
4. Reports, based on Notes and observations taken while executing the assignment
a) Main Audit Report : Reference may be made to
Auditor’s main report needs to unambiguous, the reporting requirements
complete and clear in conveying what is expected to for the Main Report (Section
be reported. Information which is factual (and not D) and the recommended
means of information), must be ensured and the text of the Main (Statutory)
concept of materiality kept in view, while Report {Section D.1 and
expressing opinion on the Branch financial D.2 (for Nationalised Banks)
statements/returns under audit. and Section D.3 for Banking
Companies)}, with some
While the Banks may require the branch auditors to illustrative comments /
give their reports in the form and manner stipulated observations / qualifications
in the appointment letter, the reporting requirements in Section D.4. The formats
in compliance of the auditing standards, need to be of reports recommended by
kept in view ; and the auditor may, if circumstances the individual banks must be
so warrant give a modified opinion (qualified in compliance with the
opinion, disclaimer of opinion, adverse opinion) statutory/regulatory
requirements.

In the EDP environment, it is imperative that Refer Section C III

the auditor is familiar with, and is satisfied that,
all the accounting and other norms/parameters,
including as per the latest applicable RBI
guidelines, are incorporated and built into the
system that generates information/data having a
bearing on the classification/ provisions and
income recognition. The auditor should not go
by the assumption that the system generated
information is correct and can be relied upon.
There must be credible evidence that
demonstrates that the system driven information
is based on validation of the required
parameters for the time being in force and
applicable. The Branch may generally not be
able to satisfy the auditor as to system
validation that will necessitate a disclaimer on
the same in his report.
Memorandum of Changes (MOC) forming part of the Some banks have resorted
Main Audit Report to the practice of
The financial statements of the branches are drawn uploading the reports of
up virtually the same day at the year end and the the auditors on their
unaudited figures are frozen. Based on the audit central servers and
exercise carried out (generally subsequent to the requiring the digital
year end) as per the Audit Programme, it is only signatures of the partner
through the Memorandum of Changes (MOCs), concerned. Due, either to
that the errors/ omissions are remedied at a the system fault, or the
centralized level to give effect to the accounting incapability of the bank’s
adjustments required but not made at the branch up computer to accept the
to the year-end. The MOCs: reports, if these cannot be
i. will also include changes in the classification uploaded, it is imperative
status of the advances accounts, as that the hard copies are
compared to that determined by the branch sent to the Head Office
management, to enable provisions to be Auditors as also through e
made accordingly at the centralized level of mail.
the bank; and wherever such classification
change involves downgrading of the
advance to NPA, the MOC will also deal
with the necessity of derecognition/ non
recognition of income accrued but not
realized.
ii. will require quantification to the extent
possible and ascertainable;
iii. will need to be given by nature, if not
quantified; and
The No. of the MOCs with quantification and the
No. of the MOCs where quantification is not
possible need to be given, along with the
adjustments/provisions not dealt with at the branch
level, as per the Bank’s laid down instructions.

b) Long Form Audit Report (LFAR) Refer Section D.L, D.L.1,

LFAR must not be reckoned as a substitute for D.L.2 and D.L.2.1
the Main Report as this is pursuant to a Regulatory While preparing his report,
requirement, expecting the Auditors to examine the the auditor need not limit or
responses to the questionnaire in a structured restrict his report to the
format and is intended for the Management. structured LFAR
Responses prepared by the Branch Management to questionnaire prescribed by
Long Form Audit Report (LFAR) questionnaire RBI. He should also
should be verified by the Auditor for the purpose of elaborate his qualifications
that report. (contained in the Main
Report) and if he comes
across other matters that
deserve the attention of the
Bank management, he
should incorporate such
matters in his report
c)Tax Audit Report:

Some banks have centralized the Bank’s Tax Audit appointment to one auditor. Where
the branch auditor also is appointed for Tax Audit, the Report is expected to be in line
only with the legal requirements in the form and manner prescribed as per the Income
tax Act, 1961, and requires the auditor to examine information on facts/figures made
available at the Branch; and he also places reliance on certain information made known
to the Branch by the Head Office. The related report on facts and opinion are in a
prescribed form.
d) Other Certificates/ attestation:

In giving other certificates/attestations, the Auditor needs to satisfy himself as to the
factual information and the level of assurance that he can take responsibility for.
Circumstances may warrant a negative assurance in some cases (e.g., as in case of the
attestation in Section L) which is recommended for the compliance of the Ghosh and
Jilani Committee requirements, particularly as many of the items of information are
incapable of verification by the Branch Auditor.
5 Auditors are advised to be familiar with the Refer Section Q for Gold
transactions arising from the Gold Monetisation Monetisation Scheme and
Scheme pursuant to the RBI directive Section R for trade credits
No.DBR.IBD.No.45/23.67.003/2015-16 dated 22-10- for imports into India.
2015 applicable to banks opting for the scheme, as
also in relation to trade credits for imports into
India.
6 Internal Peer Review: Refer Section S.

It is advisable that the Auditors carry out an internal
Peer Review and record the same.

7 Conclusion:
The entire assignment of audit/attestation as per the terms of appointment should be
completed simultaneously to enable the auditor to furnish all the reports and certificates.
It is hoped that the recommended Audit Programme and other guidance would assist the
Branch Auditor in the expeditious and satisfactory completion of the assignment and
should also enable the preparation of meaningful and effective reports in the manner
expected.
Acknowledgement:
We wish to place on record our deep gratitude to CA. Ashish Agarwal, CA. Anuj Dhingra,
CA. Himanshu Garg, CA Nitin Jain and Shri Rakesh Sharma for their time and valuable
contribution, in the preparation of the Audit Programme and other guidelines / instructions /
reference material.
CA.M. M. KHANNA & CA. SANJAY VASUDEVA

New Delhi;
February 13, 2018

(On the letter head of the firm) A
March __, 2018
The Manager
_____________ Bank
_____________(Branch) URGENT
___________________
Dear Sir,
Sub: Audit of the accounts of your Branch for the year 2017-18 - Audit engagement/ Letter
seeking information/Management Representations:
You have already been informed by your Management, that we have been appointed as the
auditors to audit and report on the accounts of the Branch for the year 2017-18.
We have accepted the appointment, and we confirm that the audit shall be carried out in
accordance with the applicable legal provisions and the regulatory requirements, besides the
applicable authoritative pronouncements of the Institute of Chartered Accountants of India, with the
objective of expressing an opinion on the Branch financial statements. For this purpose we will
perform sufficient tests to obtain reasonable assurance as to whether the information contained in
the accounting records and other source data is reliable and sufficient as the basis of the
preparation of the financial statements; and whether the information is properly presented in the
said statements.
Management’s Responsibility for the Financial Statements:

You are aware that it is the Management’s responsibility for the preparation of the financial
statements including adequate disclosures and making judgments and estimates, that are
reasonable and prudent so as to give a true and fair view of the state of affairs of the Branch at the
end of the financial year and of the financial performance (profit or loss) of the Branch for that
period, in accordance with the statutory and Regulatory requirements for the time being applicable.
The Management’s responsibility includes the maintenance of adequate accounting records the
selection and consistent application of appropriate accounting policies and implementation of
applicable accounting standards along with proper explanation relating to any material departures
from those accounting standards and the design, implementation and maintenance of internal
controls, not only for the safeguard of the assets of the Bank/branch, but that are relevant to the
preparation and fair presentation of the financial statements that are free from material
misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these financial statements based on our audit. An
audit includes examining, on a test basis, and performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements. The procedures selected will
depend on our judgement, including the assessment of the risks of material misstatement of the
financial statements. In making those risk assessments, we shall consider the internal control
systems to design audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Branch internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of the
accounting estimates made by management, as well as evaluating the overall presentation of the
financial statements. We will conduct our audit in accordance with the standards on auditing
generally accepted in India and with the requirements of law. These Standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial
statement presentation. However, having regard to the test nature of an audit, persuasive rather
than conclusive nature of audit evidence together with inherent limitations of any accounting and
Bnkad18.sanjay v & mmk 1

internal control system, there is an unavoidable risk that even some material misstatements of
financial statements, resulting from fraud, and to a lesser extent error, if either exists, may remain
undetected.
In addition to our report on the financial statements, we expect to provide you with a separate letter
concerning any material weaknesses in accounting and internal control systems which might come
to our notice through the Long Form Audit Report (LFAR), essentially in response to the
questionnaire prescribed by the Reserve Bank of India, or otherwise.
We also wish to invite your attention to the fact that our audit process is subject to `peer review’
under the Chartered Accountants Act, 1949 and the reviewer may examine our working papers
during the course of such review.
We wish to complete some audit procedures even prior to the year-end, depending on your state
of readiness/response.
In view of the severe time constraints imposed, we are confident you will make available to us,
strictly within the dates stipulated, the following Branch returns/statements duly completed, pre-
reviewed and duly authenticated, to enable us to furnish our reports in the form and manner
desired of us by law or by the Reserve Bank of India and not necessarily in the form and manner
prescribed by the Bank:
Statements/returns:
a) the Balance Sheet as at 31.3.2018;
b) the Profit and Loss Account for the year 2017-18;
c) the statements relating to the particulars of Advances as at 31.3.2018; and
d) other supporting returns/statements/annexures (including those covering the LFAR
requirements).
In connection with our assignment, we seek from you the Information/ clarifications as stated in
Annexure Ì' to this letter and may seek further information on other matters in the course of
audit. As part of the audit process, we will expect to receive from the Management, written
confirmation of the representations made to us and a written response (para-wise), to our
requirements is imperative, and such response is to be based on your verification of facts
and evidence.
To enable us to monitor the progress of the audit and completion of the assignment, please
indicate/mention, the actual date(s) of completion as well as handing over to us of each
statement/return/ confirmation or other information required to be prepared by you (as per
the contents of the letter of appointment sent to us), by your endorsement of the date on
each such statement/return/confirmation, (duly authenticated).
We await your commitment.
We shall be grateful if you could confirm the name(s) of the Officer(s) designated by the Branch
to comply with our requirements in connection with the audit, so that our reports are expedited.
We shall appreciate your co-operation in the matter.
Thanking you,
Yours faithfully,
CHARTERED ACCOUNTANTS

Annexure I to letter dated March __, 2018
INFORMATION /REQUIREMENTS IN CONNECTION WITH THE AUDIT OF ACCOUNTS FOR THE YEAR ENDED
MARCH 31, 2018
1. Latest Reports:
For our scrutiny, the following latest reports on the accounts of your Branch, and compliance
by the Branch on the observations contained therein:
a) Branch Audit Report and Accounts;
b) Long Form Audit Report;
c) Internal Inspection Report;
d) Internal/Concurrent Audit Report(s);
e) Credit Audit Report;
f) RBI Inspection Report, if such inspection took place;
g) Income and Expenditure Control Audit/Revenue Audit Report;
h) Quarterly review report;
i) IS/ IT/Computer/EDP Systems Audit; and
j) any special inspection/investigation report.
If there has been a change of Incumbent during the year in the Branch, our attention may be drawn to
any observations/remarks that may have been made by the Incoming Branch Head, with regard to the
the financials of the Branch that have effect on its state of affairs or working, particularly as regards the
classification status of the advances.
2. Circulars in connection with Accounts/financial statements:
Please confirm that you will have at the Branch, for our ready reference, a list and copy of all the
HO/CO/RBI circulars, including the year-end closing of Accounts Circular(s), relevant to the
accounts for the year 2017-18.
3. Accounting Policies:
Please confirm that you will provide us a copy of the Bank’s Accounting Policies as applicable to the
Branch. If there is a change, since the preceding year, in the said policies, as having an impact on the
Branch statements/returns, we may be duly informed of the same and the financial effect thereof may
be computed to enable us to verify the same.
4. Accounts, if maintained on Computer/ in the EDP environment:

Please confirm:
a. the system followed for maintenance of accounts in relation to the branch, including in particular the
system generated information/data and that on the decentralized basis at the branch. We may also
be informed of the nature of software package(s) currently installed at the Branch to supplement
that as per the centralised system; and whether there are any changes/ modifications in the
package(s) since the preceding year, as regards the systems as well as changes in the system
driven information, brought about by virtue of regulatory/statutory amendments and H.O.
Circulars, including in particular affecting the revenue, due to applicability of revised interest rates
on deposits, advances etc.
The nature, basis and the effective dates of the modifications , may please be confirmed to
us.
b. whether the print-out of books is taken and can be available for our review, simultaneously with the
branch returns/statements.
c. the system laid down for computer and data security, back-ups, off-site storage (including locations
and personnel in charge), contingency and disaster recovery system/plans and adherence thereto at
the Branch; and whether the system ensures periodic testing of data.
Any adverse features observed during the year may be confirmed, along with the remedial
action taken.
d. Whether the computerized system applicable for the branch, has been validated to ensure
that all the requisite /applicable parameters are incorporated therein. This may be evidenced.
e. that you will make available for our examination, the file relating to the daily exception reports on
the “system” as well as “transactions”, and that, arising out of these reports, there is no pending
remedial action/ compliance upto the year end; as also that the statements incorporate
adjustments required based on the month-end/day-end procedures as at the year-end. Any such
report that is pending compliance may be brought to our notice.
Annexure I to letter dated March __, 2018 (Contd.)
f. whether, all transactions that required manual intervention to the system generated
information/data have been duly adjusted in the books and incorporated in the financial
statements of the Branch.
5. Deposits (Refer also to the format as per Annexure VI)
a) Overdue/matured Term Deposits:
i) Please confirm whether and the extent to which balances comprising unclaimed /overdue/
matured Term Deposits in various categories, as at the year-end, have been treated and
shown as Term Deposits, particularly where the Branch does not have any instructions/
communication for renewal of such deposits from the account holders; and being in the nature
of Demand Deposits, these are required to be disclosed as such in the Branch returns as at the
year end.
ii) We understand that you have the system for automatic/suo moto renewal of term deposits
on maturity. If there are any such deposits to which the automatic renewal (including those prior
to the cut off date when the scheme was made applicable), please confirm the amount of such
deposits and the basis and amount of interest , if any accrued thereon till the year end,
particularly in case of deceased depositors.
It may be confirmed as to whether the interest is
 Simple/compounded interest since the date of last maturity of the original/initial deposit; or
 based on the rate applicable on the date of each maturity of the deposit, on the presumption
of its renewal;
and whether any excess/short provision relating to the prior periods i.e. up to 31.3.2017 has
been considered in the accounts under review.
The computation of interest may be evidenced for our verification.
The number and amount of such deposits and interest till the year end, may be
confirmed, both for Rupee denominated as well as for such foreign currency deposits
which on maturity are to be denominated in Rupees.
iii) Please confirm that the renewals of deposits are made net of tax deducted at source, at
the rates as applicable.
iv) Please let us have a list of deposits, which have been received/ suo moto renewed, but
where:
- deposit receipts are not physically issued, although book entries have been made as per the
computerized system,
- deposit receipts are physically issued but not dispatched to deposit holders (particularly where
the amounts received in foreign currency are to be covered by Deposit Receipts from another
foreign exchange authorized Link Branch).
- renewals have been made by endorsement of renewal on the existing Deposit Receipts of
the deposit holders, without issuing fresh receipts.
A list of such unissued/ undispatched Deposit Receipts in the physical custody of the
Branch may be given and the Receipts produced for our verification.
v) Please also confirm whether any deposits have been renewed other than in the name(s) of the
original holder e.g. in the case of deceased depositors. In such cases, it may be confirmed to
us as to whether the Branch holds the necessary evidence on record.
vi) Please confirm as to whether Interest accrued but not due and for which provision is made as at
the year end, is shown in the balance sheet as part of:
 Rupee denominated Fixed/Term Deposits(indicate interest accrued and not due, if forming of
the Deposits); or
 FCNR(B) deposits (indicate interest accrued and not due forming part of Deposits); or
 Savings Bank Accounts; or
 Other Liabilities – Interest Accrued (indicate interest accrued but not applied to the individual
Savings Bank accounts);
Further, whether Tax is deducted in respect of the same and duly deposited within time.

vii) Please confirm whether the Branch holds any foreign currency denominated (FCNR(B)) deposits ,
whether with fixed maturity or otherwise, which have become inoperative. You are aware that in
terms of Foreign Exchange Management (Crystallization of Inoperative Foreign Currency
Deposits) Regulations, 2014 and vide Notification No. FEMA 10A/2014-RB dated March 21,
2014 , issued under Foreign Exchange Management Act (FEMA), 1999 relating to inoperative
foreign currency deposits, directions had been issued under Sections 10(4) and 11(1) of FEMA;
inoperative deposits having a fixed term and those with no fixed term maturity, after the
expiry of a three month notice upon completion of three years , will get crystallized into
Rupees. Please confirm if any such action was required but not taken in the Branch.
b) Tax Deduction at Source
i) Please confirm the system followed by the Bank with regard to deduction of tax at source on
interest on deposits (including in respect of interest accrued but not due as aforesaid), and
whether in respect of interest (based on credit or payment whichever is earlier), including
in respect of cumulative Deposit Schemes and on renewals of matured deposits, Tax as
required to be deducted at source was so deducted on due dates and deposited within the
prescribed period; Cases of non compliance may be listed for our review and incorporated
in Form 3CD (Tax Audit Reporting Format).
ii) We may be informed if there are any amounts of Tax Deducted at source (either due to a
demand raised by the Tax Authorities, or in respect of provisions, or otherwise), which
remains to be linked to the accounts of the depositors /lenders, and in respect of which
the amounts have not yet been incorporated in the related TDS Returns.
c) Back- ended or other subsidies adjustable against advances
Please confirm whether Deposits include any amounts received under specific schemes. If so, the
amount thereof and interest, if any, paid thereon during the year, may be confirmed; and whether
interest on advances is calculated net of Govt. subsidies, if any, in such schemes, contrary to
RBI applicable norms.
d) Deposits held as margins:
Please confirm whether against issue of guarantees/ LCs, the Branch holds any cash margins by
way of fixed deposits, shown as part of the `Deposits’ portfolio.
If so, the aggregate amount of such deposits may be made known to us.
e) Inoperative Deposit Accounts:
Please confirm the procedure followed at the Branch with regard to identification of Dormant/
Inoperative Accounts and safeguards as to operations therein; and whether the identified
accounts are segregated/ maintained in separate distinct ledgers.
Please let us have information as regards debits, if any, in accounts while the accounts were held as
inoperative or dormant.
f) Gold Monetization Scheme (GMS)
Please confirm if the Bank Branch is designated to hold deposits under the Gold Monetization
Scheme (GMS), in terms of the RBI Master Direction No.DBR.IBD.No.45/23.67.003/2015-16 dated
22-10-2015 and also
Please Confirm whether the Branch:
 is designated to accept, from eligible persons, deposits the principal and interest of which under
the Scheme and Directions is to be denominated in gold.
 as accepted any such deposits {STBD (Short term Bank Deposits)} and recorded them in its
books on due dates; and maintains a record of {MLTGD (Medium and Long term Govt. Deposits)}
 has evidence on record as to the option excised by depositor (at the time of making the STBD
deposit) to redeem either in gold or at Rupee equivalent of the gold value.
 has followed the internal controls with regard to acceptance of deposits, including ‘KYC’ norms.
 has kept in safe custody, and is in possession of the gold accepted till the date of commencement
of interest.
 has appropriately disclosed the value of gold held in its Balance Sheet.
 has imported any gold for redemption of STBD; and whether any such deposits were redeemed
as per Scheme.
 has maintained a memoranda record of MLTGD, including safe custody of gold equivalent of
MLTGD on behalf of the Government.
 has sold any gold to MMTC for minting India Gold Coins (IGC), or to jewellers and other banks
participating in Gold Monetisation Scheme (GMS).
 has lent gold under Gold Metal Loan (GML) Scheme to MMTC for minting IGC and to jewellers
 has accounted for the advances to jewellers based on the contractual terms to obtain the value of
the gold on completion of tenure of loan together with interest accretion.
6. Balance(s) with other Banks(including RBI/SBI):

Please let us have balance confirmation certificates and the related reconciliation statements in
evidence of the year end outstanding balances with other banks, if any; also confirming whether
there are any entries arising therefrom as have effect on revenue up to 31.3.2018. For this purpose
you may let us know how the pending items in reconciliation were adjusted after 31.3.2018, and
whether these are considered in the Memorandum of Changes (MOCs).
In case a currency chest is attached to the Branch, whether all deposits into and withdrawals
from the Currency Chest, of currency have been duly communicated on a value date basis to
the linked branch of the Bank, unless the Branch itself maintains the account of Reserve Bank
of India, to effect the necessary adjustments. In the latter case, it may be confirmed whether
the inward currency chest slips from other linked offices are recorded on a value date basis till
the year end, unless covered by MOC.
7. Advances:
a) Please confirm whether the aggregate of the advances as per the Branch Balance Sheet as at
31.3.2018 reconciles with the Particulars of Advances (Portfolio) statement after including /considering:
 interest bearing staff advances;
 credit card dues;
 debit balances in Savings/Current deposit accounts;
 unappropriated credit balances (including in litigation) pending adjustment;
 DICGC/ECGC and other credit guarantee claims received and pending adjustment;
 Interest Suspense or any account of similar nature;
 FITL Accounts and related credit towards provision;
 Subsidies (and interest thereon, to the extent requiring adjustment) ; and
 foreign exchange differences on the above, if decentralized.
A summary of the particulars of Advances as per Annexure II may be provided to us.
Centralised Advances Processing Cells/Centres

In case all or any of the loan procedures (whether in connection with grant or renewal of credit
facilities) are not conducted at the Branch, but are centralized at any Loan Processing Cells/Centers,
(e.g., Retail Assets and Small & Medium Enterprises City Credit Centre, Retail Assets Credit
Processing Centre, Retail Credit Processing Centre, or by whatever name called), involving
appraisal, sanction, execution of documents, disbursements, collection and holding of post dated
cheques etc., and the documents are in the custody and control of the said centralized Cell/ office,
please confirm as to your preview of the compliance of the applicable RBI prudential norms of asset
classification, income recognition and provisioning, in so far as the advances at your Branch are
concerned.
We would like you to satisfy us as to the compliance of the appraisal systems, completeness and
accuracy of the original records/documents in the custody and control of the centralized office,
pursuant to which you are maintaining the borrowal account; and in particular:
i. that confirmation is available from the said Office as to the number and amount of the advances
accounts, and whether these tally with the data in the Branch;

ii. that the Sanction Letters issued to you by the said centralized office and held by you for your
compliance at the Branch, are duly authenticated (and not merely computer generated, without
authentication), and that the centralized office has confirmed that these sanction letters
subsequent instructions were issued strictly as per the applicable documentation and sanction
terms with all updated modifications/ changes therein; and that these in any case are in
consonance with the applicable prudential regulatory norms, based on the Guidelines/regulatory
impositions in force.
iii. that the system generated data for the Branch advances is in line with the regulatory built in
parameters, based on facts made available from the centralized office as regards matters other
than operation of the credit facilities and accounts recorded at the Branch.
iv.that the drawing power/limits have been properly computed at the centralized office as conveyed to
you for your ensuring that the account of the borrower is monitored at the Branch accordingly,
without any defaults;
v.that adverse features pointed out by the Internal/concurrent/inspection audit of the centralized
office as regards the appraisal, disbursement, sanction, documentation under their control, have
been considered by you for classification of the account; and further that there are no unbanked
post dated cheques held by the said office affecting the borrowers’ accounts.
vi.that for the purpose of audit, the Branch will provide evidence at the Branch, as to the
documents, security and guarantee aspects etc. to justify the classification of the amount reflected
in the branch books as advances; and information sought, including on all large advances, in the
manner required by us.
The above information is critical to our examination/reporting on advances and may please be
ensured at the Branch.
b) Please let us have a list and particulars of advances accounts corresponding to each category as
per the recommended format in Annexure IA to this letter.
c) In respect of Advances(large borrowers), each with outstandings above 5% of the total Advances
Portfolio of the Branch or Rs. 200 lakhs whichever is lower , the year-end Status Report on
may be given as per Annexure III, III.1 and III.2, which includes information as per the
LFAR.
Where there are adverse comments on any borrowal accounts as to classification, please let
us have reasons/justification for not accepting such adverse comments, or change in
classification.
d) Please confirm whether:
- the borrowers' accounts have been classified by the Branch according to the RBI norms for the
time being applicable, particularly the Non-Performing Assets(NPA) [Sub-Standard, Doubtful
or Loss assets].
In case a computerized package is being used for such classification, whether the Branch can
demonstrate effectively that the applicable latest parameters as per the prudential norms of
RBI,have been duly incorporated in the package.
- the Branch has examined the accounts based on documentation security/guarantee/operations
aspects etc., and except as otherwise required by RBI, determined the status borrower-wise
and not account-wise for categorising the accounts, as above; and in case the loan
processing, appraisals, sanction etc. is done at another centralized/designated office, the branch
has evidence on record that the compliance by it, is in consonance with the authentic
information/data received from such centralized location, as also stated in Para 7(a) above.
- the classification as at the year-end of borrowal accounts under consortium arrangements with
other participating banks, and in cases of multiple banking, has been done on the basis of
operation of the accounts as per your Branch, without the necessity of relying on classification
made by other participating banks; however, confirming to us, the status of the borrower, if
adverse, in case of other lenders.

- the Branch has evidence of the existence and realistic realizable value of the security and
that the computation of the Drawing Power (DP) has been correctly made , net of margin applicable
on paid for stocks and eligible debtors. In case of consortium advances, where another bank is the
leader, please confirm whether you have received and verified the DP to be in consonance with the
terms of your sanction. Please review all cases to determine if, and to the extent, the DP is required to be
modified on this account and as may have a bearing on the classification of the of the borrower based on
such computation of limits/drawing power. This may also be evidenced.
- parity in classification is maintained at all branches in respect of the same borrower, particularly where the
branch maintains a “sub limit” out of the borrowings sanctioned at another branch of the Bank.
- Please confirm whether there are at the year-end, any stray / other credits (including wrong
entries/adjustments) in any borrowal account but for which the account would be NPA, particularly if
the said credit(s) are reversed after the year-end.
- Please also confirm whether, while preparing the statements of advances at the year-end, no
upgradation in classification of any advance is made , based on any subsequent favourable events,
including recovery of amounts in default that may have caused the borrowing to be NPA.
e) Valuation/market value of tangible Assets:

Please confirm:
- whether in respect of the advances secured against tangible securities, the bank holds evidence of
existence and realistic realizable market value of the relevant securities as at the year-end.
- whether the existence/market value is evidenced, based on physical inspections or otherwise through
stock audit or other verification procedures applied nearer the balance sheet date; which
evidence may be produced for our examination.
- in case of NPAs, the periodicity of valuation, and the basis on which valuation is arrived at in respect of
advances for the year under audit, particularly in case the security valuation reports/dates are older than one
year.
- in respect of facilities of Rs.5.00 crores and above,
 Whether and in which cases stock audit was required, but was not conducted; and
 Cases in which stock audit was conducted where adverse features noticed have not been
addressed and whether it has any effect on classification of any borrowers; and whether the same
has been duly considered.
f) Besides furnishing us information as per Annexure II, may we request you to provide us with a
list of the:
i) Top 25 NPAs and their status as at 31.3.2017 and 31.3.2018;
ii) NPAs upgraded to Standard classification during the period 1.4.2017 to 31.3.2018, justifying
reasons for the same; also indicating the amount of any unapplied interest in such accounts
(not debited/charged to the borrower);- refer Item 4 of Annexure IA.
iii) Cases and Status of restructured accounts (covered by Part B of the RBI Master Circular
(DBR.No.BP.BC.2/21.04.048/2016-17 dated 1-7-2015) – Refer also Items 5,7,9 & 10 of
Annexures IA and IV, including those where proposals / applications received are pending
in the following categories:
 industrial units.
 industrial units under the Corporate Debt Restructuring (CDR) Mechanism
 Small and Medium Enterprises (SMEs)
 all other advances.
Indicating for each category of restructured accounts:
a. The name of the borrower
b. Classification Status pre structuring (standard', 'sub- standard' or 'doubtful' category)
c. Amount of advance requiring restructuring
d. Date of the proposal/ application
e. Date of disposal
f. Sacrifice sought
g. Sacrifice borne by the Bank
h. FITL/WCTL out of interest in default, if any, and retained for provision
i. Classification Status post re-structuring
j. Normal Provision made for classification status on 31-3-2017 and 31-3-2018
k. Provision made for sacrifice on 31-3-2017 and 31-3-2018
l. Accounts downgraded for restructured proposals
m. Accounts upgraded, with justification
n. Whether Provision for sacrifice retained in separate account, with distinction for Standard/NPA
accounts for appropriate disclosure in the balance sheet of the Bank.
iv) Refinancing of Project Loans (refer Item 20 of Annexure IA)

Please confirm if the Branch has any advances involving refinancing of the existing
advances referred to in Para 12 of Part A of the RBI Master Circular on prudential norms relating
to Advances
v) Flexible structuring of long term project loans to Infrastructure and Core Industries
Please confirm whether the Branch has any advances involving Flexible structuring of long term
project loans to Infrastructure and Core Industries, which were given prior to 15th July 2014 and
th
fresh ones considered post 15 July 2014(whether in consortium or multiple banking or those
involving financial institutions). A list and classification status thereof may be given, indicating
whether these were restructured in the past or were fresh proposals covered by Paras 10 and 11
of Part A of the RBI Master Circular dated 1-7-2015 on prudential norms. (Refer Item 21 of
Annexure IA).
vi) Borrowers identified/classified as NPAs during the year and whether, and extent to which,
unrealized income on such accounts is reversed/ derecognized. In case the unrealized income
on such accounts has been reversed by giving credit to the accounts of the borrowers, the
amounts so reversed may be made known to us. (Refer Item 23 in Annexure IA).
vii) Post-restructuring classification:

Please confirm as to whether bank guarantees and State and Central Government Guarantees
(otherwise intangible by nature) and which were, for the limited purpose of restructuring, treated at
par with “tangible security”, have not been so considered in the post restructuring classification.
viii) Accounts where there was rehabilitation/ reschedulement/ restructuring/ rephasement indicating in
each case, the number of times the same has been done, and accounts in which the Bank
needs to exercise its right to recompense, indicating the amount at the year end, also giving
reasons for non-recovery thereof;
{The aggregate of such amounts due (party-wise), and the dates on which recoupment is to
be made, may please be made known}.
ix) Cases covered in Part B of the RBI Master Circular (DBR.No.BP.BC. 2 /21.04.048/2016-17 dated
1-7-2015), where pursuant to restructuring, part of the principal and/or interest unrealized and/or
in default was converted to investments by the Bank, including where borrowers were granted
funded interest term loan facilities, and a confirmation as to whether the prudential norms have
been followed for provisioning and income recognition. (It may also be confirmed that during the
pendency of the application for restructuring of the advances, the usual asset classification norms
have been made applicable).
x) List of Borrowers, treated as Standard, where one time settlement was sanctioned, but there is a
default in repayment or in compliance of the terms thereof;
xi) Particulars of Advances where there is divergence of opinion between the Branch Management and
the RBI/Inspection/ Internal/Concurrent audit Reports etc., indicating as to how this has been
addressed by the Branch.
xii) The aggregate of the amounts of advances in the standard category which have the status of
“critical amount due”; and whether any amounts comprised therein are over 90 days in default as at
31.3.2018.
A list of such accounts may be made available and quantified, for our review.

xiii) Borrowal accounts (in standard category), which have not been reviewed/ renewed for 180
days since the due date of their last renewal, or where there is a default on the part of the
borrower in submission of stock statements, for a period of 90 days beyond any period
of default/irregularity, including that commencing prior to 31.3.2017; and if so, whether
such borrowers are classified as NPAs.
Particulars of accounts overdue for review/renewal between 6 months and 1 year, and those
over 1 year may be provided.
xiv) accounts which do not fall within the definition of advances, such as interest free employee
advances, but have been shown as such in the accounts of the Branch may be listed for our
review.
xv) advances accounts which have been identified as of the nature of NPAs, and where, pending
formal sanction of the higher authorities, the relevant amounts have yet to be
reclassified/recategorised for the purpose of provision/write off. This covers all accounts
identified by the Bank or internal/external auditors or by RBI inspectors but the amount has
not been written off wholly or partly.
xvi) accounts in which the Bank, or the Branch has itself recommended legal or other coercive action
for recovery of dues and, where no such action has been taken up to the year -end against the
borrowers. A list of such borrowers' accounts may be furnished to us, particularly if such accounts
are in standard or sub standard category.
xvii) borrowal accounts in the “Standard” or “Sub Standard” category which are the subject
matter of reference to BIFR/ DRT or in litigation, justifying their classification.
xviii) Advances to borrowers on the list of willful defaulters (as per the latest list and guidelines of the
RBI).
xix) all accounts where the default resulted in WCTL, FITL, WCDL etc. and whether the
advances would be NPAs but for such facilities.
g) Upgradation of classification:
Please let us have a list of borrowers' accounts (including projects under implementation and
restructured accounts), where classification previously made, has been changed to a better
classification, stating reasons for the same; and whether provision (including for the Interest sacrifice, if
made), on the borrowal accounts, is sought to be reversed contrary to RBI’s master circular.
Please confirm whether Advances comprising Funded Interest, if already recognized as income,
is fully provided for and not reckoned as income till realization/ redemption of securities. This
would also apply to funded interest where the same is converted into securities (equity,
debentures or other instruments), if held at the branch.
h) Devolved Letters of Credit(LCs)/ co-acceptances, and guarantees:

Please confirm:
- the precise procedure followed for accounting treatment of devolved obligations
(guarantees/LCs); and whether the debits have been raised in separate distinct accounts of the
borrowers or to the normal cash credit/overdraft accounts of the borrowers; and whether
these are aggregated for classification of the borrower/account
- whether and the extent to which there are any devolved LCs upto the year-end, which are
pending payment.
For Information on guarantees invoked, and outstanding LCs/ co- acceptances.
Refer format in Para 5(e) of Part 1 of the LFAR questionnaire.
i) Please confirm:
i. In case of one time settlement proposals under consideration or where rehabilitation/
rephasement is being done, whether the amount of sacrifice including anticipated sacrifice
is provided fully.
ii. Particulars of accounts where the borrowers have defaulted in their commitments after sanction of
the compromise proposal, indicating classification of the amounts, may be made available.
iii. Whether the Bank has a recovery policy in cases of compromise/ settlement/write off and is the
policy available at the Branch.
iv. Particulars of cases of compromise/settlement/write off involving write off/ waiver, each
in excess of Rs. 25 lacs, may please be furnished.
v. The name and amount outstanding in the case of the borrowers each having working capital limits
of Rs.10.00 lacs and above, as also those subject to compulsory audit under any statute, where
the latest audited accounts are not on record.
vi. Compliance by the Branch of the RBI Master Circular No. DBOD.No.Dir.BC.10/13.03.00/2016-17
dated 1-7-2015, relating to statutory and other restrictions as regards Loans and Advances. In
particular it may be confirmed as to whether, at the Branch:
- there are any loans and advances against security of the Bank’s own shares.
- there is any laid down procedure as regards identification of directors/ officers and their
relatives and of directors of other banks for purposes of sanction of loans to them or to
concerns in which directors are interested, as per the said circular.
- loans have been given to companies for buy back of their shares/securities.
j) Advances to share brokers/NBFCs:
Please confirm whether at the Branch, there are advances to:
- share brokers; if so, the total amount of limits granted and the aggregate advance due as at the
year-end.
- NBFCs; if so please confirm whether the RBI has taken any adverse view as regards their
registration or otherwise. The status on advances to NBFCs may please be made known, along
with their classification.
k) Advances to Staff -Please confirm:
- the procedure with regard to Advances to Staff (interest/non-interest bearing), by the Bank, both in
its capacity as a banker and as an employer; also whether such interest-bearing advances are
being disclosed as Advances.
- the verification procedures followed in respect of Staff Housing Loans, and in particular, whether
the original documents are held at the Branch and can be produced for our examination.
- Are there any cases in default of collection of the principal/interest, where due and recoverable
l) Credit Cards :
Please confirm the system followed at the Bank/Branch for recovery of credit card dues; and
whether, and the extent to which, there are debit outstandings on account of Credit card dues,
have been treated as Advances, and not ‘Other assets’
m) Stressed Assets:
Please let us have the list of borrowers who are falling under the Schemes for Sustainable Structuring /
Stressed Assets and let us have information in the formats given as per Annexure V.
n) Please let us know whether there are any borrower accounts comprising MSME accounts as also large borrower
accounts as stipulated respectively in Circular No. FIDD.MSME & NFS.12/06.02.31/2017-18 dated 24-7-2017
and DBR.No.BP.BC.101/21.04.048/2017-18 dated 12.2.2018 of the RBI with regard to which you have applied
appropriately the IRAC Norms.Please confirm whether this is in accordance with the Board approved Policies.
Special attention may be paid to large restructured accounts requiring reporting as to their credit information and
classification (SMA-0, SMA-1, SMA-2) ; and further accounts that require reconsideration as to the IRAC norms,
if covered by RBI DBR.No.BP.BC.101/21.04.048/2017-18 dated 12.2.2018 circular.
8. Outstandings in Suspense/Sundries:
Please let us have a summary of the year-wise break up of amounts:
- debited to Suspense Account (or similar account) indicating, as at the year end, the number of
entries and the amount thereof, with reasons for non-adjustment of old/large/ unusual entries.
The amount of provision for doubtful amounts may be confirmed.
- credited to Sundries/Sundry Deposit Accounts, indicating the reasons for non- adjustment of
items included therein, particularly in respect of items which are over 3 years old.
(Information may please be provided in the formats as per the LFAR).
- Please confirm the amount at debit on account of TDS paid and outstanding, not linked to
any party.
9. Provisions/Liabilities remaining unadjusted against corresponding advances:

Please confirm whether provisions for known liabilities, up to the year end have been made (also,
based on subsequent entries made); and if, and the extent to which, any provisions are required
towards advances of expenditure nature (e.g. Travel Advance).
10. Inter-branch/Office Accounts/Head Office Account:
a) Please let us have a statement of entries (head-wise) which originated prior to the year-end at
other branches, but were responded after the year-end at the Branch, upto the cut off date, if
given by Head Office; otherwise, upto the date of the audit. (Refer Format at Annexure VII ).
b) Date-wise details of debits in various nominal or other sub-heads relating to Inter-branch

transactions, with reasons, particularly for old/ large outstanding amounts, including those
which are pending for over 30 days as at the Balance Sheet date.
c) Please confirm:
- whether there are any temporary debits pertaining to any advance /borrower’s account wrongly
recorded in Inter branch /Head Office account , that have been reversed after the year end.
- whether the Branch has effectively complied with the centralised Reconciliation Cell, all their
queries in relation to unmatched entries.
Communications pending action, and having effect on the accounts for the year, may be
made available for our review.
- the number of old unadjusted entries and the aggregate amount as at the year-end comprising
unlinked debits retained at the Branch, in respect of Drafts and TTs, MTs paid, which remain
outstanding at the Branch; and whether, and the extent to which, provision is being
considered for the same.
- the period up to which the Reconciliation Cell has sent the statements of unmatched entries
(head-wise).
11. Foreign Currency outstanding transactions:
If the Branch is carrying balances (including in off-balance sheet items) in foreign currencies as at the
year-end, whether , and the basis on which, these have been converted as at the year-end, may be
made known.
Evidence/basis of the rates as applied may be made available.

12. Contingent Liabilities etc.:
Please confirm whether:
- there are any demands/claims (whether statutory, regulatory, contractual or otherwise) on account
of litigation, arbitration or other disputes having financial implications, including claims from
customers, fraud cases, for staff claims, municipal taxes, local levies etc. The nature and
extent of such contingent liabilities, if not considered in the Branch financial statements, may
be communicated.
(Reference may also be made to the LFAR - Para II.3).
- guarantees are being disclosed in the Branch Balance Sheet, net of cash margins and term
deposits; and whether, and the extent to which, expired letters of credit, and guarantees
where the claim period has also expired, and obligations have ceased, these continue to be
disclosed in the Branch returns.
The amount of such expired obligations may be made known.
- other obligations assumed, e.g., Letters of comfort have been disclosed in the Branch returns;
and that, based on the related documentation, these do not comprise funded liabilities by or
on behalf of the bank (by way of Buyers’ Credit etc.).
- there are any outstanding contracts on capital account (including for fixed assets to be acquired/
constructed). Details thereof may be given.
- there are any awards in arbitration/litigation or disputes involving any liability (including based on
any awards by the Banking Ombudsman).

13.Interest Income/Expenditure:
a) Please let us have a statement showing the rates of interest applicable during the year on
various categories of
- Advances Accounts
- Deposits Accounts
giving reference of the relevant circulars of the Head Office, and indicating the effective dates
and periodicity of application of the interest rates; and evidencing that the computer programme
was modified from such effective date(s), for any changes during the year.
b) Please confirm whether the rates and changes therein for advances, are based on the Credit
rating, as and where applicable and reflected in the accounts/ documentation.
c) Please confirm whether interest being debited at the end of each month on advances, is being
compounded for levy of further interest on a monthly basis.
d) System of appropriation of recoveries in NPAs:
Please confirm the basis on which the Bank exercises the right of appropriation of recoveries in
NPA Accounts, where there are no instructions by the borrowers; and in such cases, whether the
appropriation is made with priority given to “principal” rather than to unrealized charges, and
interest.
Please confirm whether there are upgraded restructured/rehabilitated advances accounts,
where the “right of recompense” of sacrifice borne by the Bank was a precondition, but
the same was not exercised at the time of upgradation of the borrower.
If so, details thereof may please be given to us.
e) As regards advances (including bills), whether any income has been adjusted/recorded to
revenue, contrary to the norms of income recognition issued by the Reserve Bank of India
and/or Head Office circulars issued in this regard; and particularly, in Non Performing
Accounts (including overdue bills) , if the same has been recorded except on actual
realisation from the borrowers, and not out of fresh limits sanctioned by the Bank.
f) Interest income, if recognized on certain advances:
Please confirm whether and the extent to which, you have recognized any interest as income on
the following types of advances:
 On any additional finance under an approved restructuring package treated as 'standard
asset', up to a period of one year where the pre-restructuring facilities were classified as 'sub-
standard' and 'doubtful', or in cases where the restructured asset does not qualify for
upgradation at the end of the specified period (where the additional finance is to be placed in
the same asset classification/ category as the restructured debt as NPA).
 On Central Govt. guaranteed advance, if NPA, but for reasons that the guarantee is not invoked
or repudiated requiring the account to be treated as and retained in, Standard category.
 In cases of restructured accounts, where the income recognized earlier, was, to the extent
unrealized and converted to FITL and fully provided for, is reversed or treated as standard for
further accretion of income.
 in case documents under LC are not accepted on presentation or payment under the LC is not
made on the due date by the LC issuing bank for any reason and the borrower does not
immediately make good the amount disbursed as a result of discounting of concerned bills,
whether the outstanding bills discounted continue to be classified as Standard and treated as
‘performing’.
 the reversal of interest income (i.e derecognised income), is recorded through "Interest
Suspense" or similar account. It may be confirmed whether, and the extent to which,
Interest Suspense or other similar account comprising Interest applied upto the date of
the account becoming NPA, has been reversed and credited to the account of the
borrower during the year. If so, please let us know the amount attributable to the
current year and that pertaining to the year ended 31-3-2017.
 in respect of accounts identified as NPAs during the year, amounts contractually due but
remaining unrealized as interest , fees, commission and other charges are reversed for all
earlier periods; and the unapplied interest has been computed and recorded upto date.
Amount of income accrued, if any, as at 31.3.2018 on NPAs may be made known.

g) Please confirm whether interest adjustments on inter branch balances (as per the Transfer Price
Mechanism) as communicated by Head Office, have been duly recorded in the Profit & Loss
Account of the Branch.
Relevant evidence thereof may please be made available to us.
14. Commission on Govt. business

Please confirm whether at the Branch, income is being accounted on cash or on accrual basis.
Income accrued upto 31.3.2018 but not claimed/ recorded/ received may please be confirmed to us,
together with computation thereof.
15. Interest Provision:

Please confirm whether interest provision has been made upto the year end, on Term and Savings
Bank account deposits, on eligible Current Accounts and unclaimed/unpaid deposit accounts of
deceased depositors, in accordance with the applicable contractual rates and latest instructions
of the Head Office; and the amount may be confirmed in respect of the following:
 interest accrued till the date of maturity on FCNR(B) deposits, is included in Deposits.
 Interest accrued but not applied on Savings bank deposits, is treated as part of “Other Liabilities –
Interest Accrued”
Correspondingly, if considered as due, whether Tax deduction at source has been made and
deposited within the prescribed time with the Govt.
16. Employee/Staff Payments and benefits

Please confirm that all payments and staff benefits due to the Branch employees upto the year end,
have been duly computed and recorded under the respective sub heads, including incremental
liability towards arrears, if any.
17. Rent, Rates and Taxes

Please confirm that the rents (payable as tenant, and not as reimbursement to staff towards their rent
obligations), rates and taxes are recorded up to the year end, based on:
- rent/lease agreements for the time being in force and liability has been considered on the basis
of claims/demands and contractual enhancements due;
- municipal taxes and levies are adjusted/provided up to the year-end, based on the demands
accepted; and
- in case of disputed liabilities, if any, the related contingent liability has been disclosed.
18. Penalties/fines etc:
Please confirm whether any fines or penalties have been imposed on the Branch, or incurred or paid
by the Branch during the year as arising out of any defaults to meet statutory or regulatory
requirements or otherwise. If so, the particulars thereof may be made known; as these would require
separate disclosure in the financial statements of the Bank and for consideration in the Tax Audit
Report under Section 44 AB of the Income tax Act 1961 (Form 3 CD).
19. Frauds etc.:

Please confirm whether for the purpose of provisioning, the relevant particulars have been
prepared at the Branch and whether :
- there are any frauds reported/recorded upto 31.3.2018;
- there are any known cases or transactions or events, or any enquiries have been initiated for any
suspected frauds/aberrations.
- there are any cases of vigilance or similar enquiry, or financial claims/potential claims that may
arise, from customers/others in respect of the Branch. The relevant records of these may please
be made available.
- the Branch has complied with the reporting requirements of RBI and communicated the same
as per the requisite formats, including where central investigating agencies have initiated criminal
proceedings or where the RBI had directed that a matter be treated as fraud.

20. Recommendations of the Mitra Committee – Bank Frauds
While drawing you attention to the contents of the SA 240 -The Auditor’s Responsibility to Consider
Fraud and Error in an Audit of Financial Statements, issued by the Institute of Chartered Accountants
of India, particularly in that the responsibility for the prevention and detection of fraud and error rests
with the management through the implementation and continued operation of an adequate system of
internal control, we would request you to confirm whether, in relation to the operations/activities of the
Branch, anything has come to light which is in the nature of a fraud, any fraudulent activity, or any
matter susceptible to fraud or foul play, which should receive our attention; and particularly, if there is
anything which invokes, or is the subject matter of any vigilance, enquiry, investigation or
examination as regards any transaction or event that is suggestive of attracting compliance or for
reporting to the competent authorities within the Bank, or to the regulatory authorities.
This would include matters that could arise out of inadequacies in, or absence/breach of the
laid down, internal control systems and procedures (both accounting and administrative).
Your attention is drawn to the RBI relevant Master Circulars Nos. DBR.No.BP.BC.92/21.04.048/2015-
16 April 18, 2016 , DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated July 01, 2016, relating to
Frauds – Classification and Reporting; as also Para 4.2.9(ii) of the RBI Master Circular dated 1-
7-2015 covering prudential norms applicable to Advances.
21.Asset Liability Management:

Please let us have, duly authenticated, the financial information regarding the disclosures to be made
as at 31.3.2018, as required by the Reserve Bank of India, indicating the procedure/basis followed to
arrive at the financial data.
Instructions from the Controlling Authority, in this behalf, may be made known.
22.Long Form Audit Report-Branch response to the Questionnaire:

In connection with the Long Form Audit Report, please let us have complete information, and
evidence, as regards each item in the questionnaire, to enable us to verify the same for the
purpose of our audit.
Reference may also be made to the important items as per Annexure VIII.
23.Tax Audit in terms of section 44AB of the Income-Tax Act,1961:

Please let us have the information required for Tax Audit under section 44AB of the Income-tax Act,
1961 to enable us to verify the same for the purpose of our report thereon.
24.Compliance of Ghosh and Jilani Committee recommendations

Please confirm whether the Branch has duly complied with the requirements of the Ghosh and Jilani
Committees and whether such compliance has been got verified from the Bank’s Inspection Division
and/or the Concurrent Auditors.
It may be confirmed as to whether there are any adverse observations in respect of any requirements
that may also have bearing on the financial statements of the Branch; and if so, these may please be
made known to us.
25.Consideration of laws and regulations for the purpose of the audit of financial statements:
Please confirm as to whether the Branch is maintaining a codified list of the related laws and
regulations applicable to the Bank in respect of its operations/activities to cover all transactions and
events, with which it is concerned; and whether the Branch management has come across, or is aware
of anything that needs to be brought to our notice for our consideration or anything suggesting that
there is fundamental effect on the state of affairs or operations of the Branch on account of non-
compliance of these.

26. Other Certification
Please let us have, duly authenticated, information as regards other matters which, as per
the letter of appointment, require certification/validation.
The certificates relate to the following (besides the data as per the letter of appointment to us):
a) DICGC
b) PMRY
c) 12 odd dates data for verification of SLR (Refer Annexure A IX)
d) Implementation of the Ghosh and Jilani Committee recommendations
e) Movement Chart of NPAs and Provision of NPAs (Refer Annexure A II)
f) Information relating to restructuring etc. undertaken during the year
g) Others (as communicated to you by Head Office)
27. Transactions and events after the Balance sheet date

Please let us have a statement of any significant transactions or events occurring after the Balance
sheet date but which relate to the period prior to 31-3-2018, whether or not yet recognized or
recorded in the accounts of the Branch. This would include items of income or expense or
capitalization etc. relating to the period prior to the year end. (particularly also, if these are reported
in the inspection/internal/concurrent audit reports relating up to March 2018), which need to be
incorporated in the MOC. This may kindly be communicated to us.
28. Investments:
In case the Branch holds any investments on behalf of the Bank:
a) these may be produced for physical verification and/or evidence of holding the same be
made available.
b) stock of unused security paper stationery/numbered forms like B/Rs, SGL Forms etc. may
please be produced for physical verification.
c) it may be confirmed whether income accrued/collected has been accounted as per the laid
down procedure, and is not reckoned as income of the Branch .
The procedure may please be confirmed to us.
29. Demonetisation:
Please let us know:

- Whether the Branch had any dealing in the demonetised currency during the year.
- Whether the Branch has any demonetised currency in hand.
- Whether in respect of any Branch transactions related to demonetisation, there are any queries /
issues / matters pending compliance as arising from any internal / external inspection, concurrent
audit, RBI, vigilance etc.
and whether the same has any effect on the Branch financials.
Information duly completed in respect of Paras 1 to 29 should be made available

simultaneously with the returns/ statements/ schedules, as committed by the Head
Office to be given by the Branch on 1.4.2018.
We may seek further information on matters as these arise in the course of the audit, including
on verification of information/representations made by you and would request you to respond
to the same expeditiously, considering the severe time constraints on us to complete the
assignment and furnish our report.

(on the letter head of the firm) A
Annexure IA {refer also Para 7 (b)(c ) } Re: Request for list and particulars of advances falling in the following categories (in the format as under)
Category of advances Names of the Borrowers in each category Outstanding as at the Classification as per
year end (Rs.) RBI prudential norms
1. All Large accounts (as defined- Rs. 2.00 crores or 5% of the
Portfolio, whichever is less) -per Annexure III
2. All accounts reported as Special Mention Accounts in SMA –
2 (accounts considered critical).Such accounts with unusual
credits towards year end particularly if these are reversed
after the year end, need special attention.
3. Cases under consideration of Joint Lenders Forum (JLF).
4. NPA accounts upgraded to Standard during the year
5. Advances where Restructuring Proposals/ requests are
pending approval/disposal at year end.
6. Cases where one time settlement (OTS) has been sought.
7. Accounts Restructured in the earlier years to determine their
year-end status, if in default or not classified as per RBI
norms.
8. Accounts in which OTS was accepted but there is default in
compliance.
9. Accounts Restructured during the year to determine their
year-end classification.
10. Restructured advances with moratorium of Interest
where interest is accrued contrary to RBI applicable norms
11. FITL cases arising out of Restructuring where
corresponding provisions are held in “Sundry Liabilities
Account (Interest Capitalization)”.
12. Advances accounts where there is an initiation of
proceedings involving Investigation, vigilance, enquiry and
those where fraud is reported.
13. Staff Advances – where the persons have ceased to be
employees of the Bank; and accounts in default.
14. BIFR cases classified as Standard.
15. SSI/SME cases under rehabilitation as at the year end
16. Standard advances in litigation
17. Central Government guaranteed cases which are non-
performing.
18. Standard accounts where there is Interest Suspense/
Unapplied Interest.
(on the letter head of the firm) A
Annexure IA (refer Para 7 (c ) Re: Request for list and particulars of advances falling in the following categories (in the format as under)..Contd
Category of advances Names of the Borrowers in each category Outstanding as at the Classification as per
year end (Rs.) RBI prudential norms
19. Advances in the list of willful defaulters of the RBI.
20. Advances subject to re-financing.
21. Cases of Flexible Structuring of Long Term Project Loans to
Infrastructure and Core Industries – Loans sanctioned after
July 15, 2015.
22. Cases of Flexible Structuring of Long Term Project Loans to
Infrastructure and Core Industries - Loans sanctioned before
July 15, 2015.
23. Fresh NPAs identified by the Branch.
24. NPA cases where the assessed realizable value of the
securities has a significant shortfall – 50% or more.
25. NPA cases where the realizable value of the security as
assessed by the Bank/approved valuers /RBI is less than
10% of the outstanding.
26. Standard Accounts with temporary deficiencies per Para
4.2.4 of Master Circular on Advances.
27. Quick Mortality Cases
28. Advances comprising frauds detected (Para 4.2.9.(ii) of the
IRAC Master Circular dated 1.7.2015)
29. MSME Borrowers registered under the GST Regime having
an exposure in aggregate (including non-fund based) up to
Rs. 25 Crore.
30. Other Accounts , not covered above, with adverse
comments in the existing/latest Reports (as per Para 1
above)
In case there are no borrowers in any category, please state “NIL”

A
Annexure II -Information on Advances (Amt- Rs. In ‘000)
A. CLASSIFICATION OF ADVANCES AS COMPARED TO THE PREVIOUS YEAR-END
Particulars As at 31.3.2018 As at 31.3.2017 Increase/ Remarks
(Decrease)
No Amt (Rs) No. Amt.(Rs.) Amt (Rs.)
A.1. STANDARD
- SME/Direct
Agriculture
- CRE
- Teaser Loans
- Others
A.2. STANDARD
- In SMA -2 Category
Total (A) (A.1+A,2)
B.SUB-STANDARD
C.DOUBTFUL
D.LOSS
E. FRAUD CASES
F.. Total(B+C+D+E)
TOTAL (A+F)
B. FUNDED INTEREST TERM LOANS (FITL) / WORKING CAPITAL TERM LOANS (WCTL)
Particulars As at 31-3-2018 As at 31-3-2017
No. of Accounts Amount (Rs.) No. of Accounts Amount (Rs.)
Total exposure –FITL
Total exposure –WCTL
Provision held
C.PARTICULARS OF AND MOVEMENT IN NPAs AND PROVISIONS
Gross NPA (Rs.) Net NPA Remarks
(Rs.)
As at the beginning of the year
Additions during the year
Less :Deductions
a) Upgradations
b) Recoveries (excluding recoveries from upgraded accounts)
c) Technical/Prudential Write-offs
d) Write-offs other than those under (c) above
(also refer Appendix Part C-2 of Master Circular No .
DBR.No.BP.BC.2/21.04.048/2015-16 dated 1-7-2015)
Balance at the year-end
========= =======
D. Interest etc. (ACCRUED BUT NOT EARNED) on NPAs
Particulars 31.3.2018 31.3.2017
No. of Accounts Amount (Rs.) No. of Accounts Amount (Rs.)
A. Interest
Interest Suspense or other
similar accounts
Unapplied Interest
(Memorandum Interest)
Total (A)
B. Right of Recompense
(in restructured accounts
upgraded to ‘Standard’)
TOTAL (A+B)

A
______________BANK: ZONE :___________ BRANCH :__________________
ANNEXURE–III. OBSERVATIONS/STATUS REVIEW ON MAJOR ADVANCES ACCOUNTS FOR THE YEAR ENDED 31.3.2018
(Each column needs to be filled in completely and adequately; and in case space is inadequate use inverse side) 1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1. BORROWER:
a) Name of the Borrower : :Group
b) Address :
c) Constitution : Company :Partnership :Sole Prop :Other(specify)_____________________________________
d) Nature of Business :
e) Other Units in the same group :
f) - Name(s) of proprietor/partners/Directors :
- Name of Chief Executive, if any :
g) Whether Borrower or constituents thereof are : No Yes : If Yes, give details:
on the list of willful defaulters of RBI
h) Credit Facilities: : Fund Based(Rs.) Non Fund Based (Rs.)
Nature of facilities and limits (Rs.in lakhs) Term Loans CC/OD Bills Others Total LCs Guarantees Total
Date of Sanction and authority

Due date of renewal, and authority : Actual date of renewal
Particulars of latest balance confirmation
Total exposure of the Branch Borrower (Rs.) Group (Rs.)
(Rs.in Lakhs)
i) Whether project under Implementation : No Yes : Since Category as per RBI master circular I II III
j) Give details, if the account has been subject to: : Sacrifice:* Yes No
-Rehabilitation /Restructuring( including as per BIFR) : Amount : Rs.
-Rephasement of terms Right of recompense:* Yes No
Amount : Rs.
*Basis to be enclosed

A
______________BANK: ZONE :___________ BRANCH :__________________
2
1.BORROWER:
k) Review of Facilities : Due Date : Actual Date Regular Review Yes No :Short Review Yes No
l) Credit Rating applicable during the review period : :Previous Period:
m) General level of compliance by borrower : Satisfactory :Unsatisfactory :Remarks:
2. NATURE OF ADVANCE/ FACILITIES:
In case of Consortium/ Multiple facilities, the following information is confirmed:
A CONSORTIUM: Name of the Bank % Bank’s Share(Rs.in Lakhs)
Participating Banks and their shares Term Loans Cash Credits/ Bills facilities Non Fund
i) Lead Bank (Rs) overdrafts(Rs) (Rs) Based(Rs)
ii) Other Banks(Specify):
B MULTIPLE BANKING:
Particulars of Other Banks @
(evidence thereof to be enclosed)
Note: @ Diligence Report/certificates to be received in terms of RBI Circular DBOD.No. BP.BC.110/08.12.001/2008-09 dated 10-2-2009 must be sought and be examined to ensure
that there are no adverse observations/comments by the person certifying these. The LFAR must contain the names of the companies in respect of which certification has not been
obtained from a C.A./Co. Secretary/Cost Accountant.

A
______________BANK: ZONE :___________ BRANCH :__________________
3.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
3. SANCTION (Terms and Conditions)
Security (Rs.in lakhs)
Primary *Value (Rs.) Margin (Rs.) Net Collateral Valuation Value (Rs.)
Value(Rs.) date
a) Stocks/Inventories
(*net of unpaid for stocks)
b) Book Debts
(*Eligible Debts)
c) Others (Specify)
Total Total
(Value and Margins as per working on the inverse side)
b) Other major Terms and conditions:

i)
ii)
iii)
iv)
v)
vi)
vii)
c) Guarantor(s) Central Govt. : *State Govt. : Banks :Financial Institutions :Others

*whether invoked Yes / No

A
______________BANK: ZONE :___________ BRANCH :__________________
4.
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
a)Documents Obtained:(Tick as appropriate) Yes No
DPN
Letter of Hypothecation
Mortgage Deed [Equitable/Registered]
Agreement for loan
Letter of Guarantee
Legal Opinion
Non Encumbrance Certificate
Registration of Charge (in case of Company) or evidence thereof
Others (Specify)
b) Documents required but pending completion (Specify with reasons):
c) Furnishing of copy of the Loan Agreement(s) to the Borrower (Refer RBI Circular DBR.No.Dir.BC.10/13.03.00/2015-16 dated 1.7.2015):
Date(s) of Sanction of the Loan(s) ______________________________________________________________________________________
Date(s) of disbursement of the Loan(s) ______________________________________________________________________________________
Date of furnishing of the copy(ies) of the Loan Agreement to the Borrower ______________.

A
______________BANK: ZONE :___________ BRANCH :__________________
__________________________________________________________________________________________________________________________________
5.
ADVANCES PORTFOLIO STATUS : (Figures – Rs. in lakhs for all columns)
Facility Limit Outstanding *Margin on primary Drawing Outstanding on Overdrawn Overdues
(Rs.) (Rs.) security Power 31.3.2018 Amount @ **
% Amount (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Fund based
CASH CREDIT
TERM LOANS
WCTL
FITL
Others
BILLS
OTHERS
Total xx
N Invoked/
Non Fund Based Devolved
Letters of Credit
Inland
Foreign
Letters of Guarantee
Letters of Comfort
Total xx
c) Amount at credit unappropriated Rs.___________________ #Rs.______________

d) Interest, if any, held in “Suspense Account” Rs.___________________ #Rs.______________
e) Unapplied Interest Rs.___________________ #Rs.______________
f) Bank’s right of recompense Rs.___________________ #Rs.______________
(# as at previous year end)
[* after deducting unpaid stocks and debts older than stipulated period]
@ Overdrawn amount must be with reference to lower of the limit or drawing power
** Segregate principal and interest amounts in default, indicating separately, if any amount is over 90 days overdue.

A
______________BANK: ZONE :___________ BRANCH :__________________
6.
6.A CLASSIFICATION: (as per RBI norms) (Tick as appropriate) *STANDARD #SUBSTANDARD DOUBTFUL@ LOSS
@ State also whether D1,D2,D3: # based on unsecured/secured exposures(state on inverse) Bank Auditor Bank Auditor Bank Auditor Bank Auditor
a) as at the year-end (31.3.2018)

b) as at the previous year-end(31.3.2017)
c) as at half year-end (30.9.2017)
d) Date of Identification as NPA by Bank (Date) (iv) Other Reasons for Identification as NPA (including frauds ,if any)
e) Reasons for identification as NPA (per RBI norms):
i) Default in servicing of 90 days or more Yes No
ii) Accounts not reviewed/limits not renewed for 180 days or more Yes No
iii) Funded Interest (FITL)-projects under implementation Yes No
f) Whether classification is as per guidelines of the Controlling Authority Yes No
6.B ADVERSE OBSERVATIONS IN LATEST REPORTS
Concurrent Auditor
Internal Inspection
RBI Inspection Reports
Other Reports(including Special Audit/Credit Audit/Stock audit)
*State reasons for upgradation of Account if NPA earlier.

-Whether upgradation is in respect of project under implementation: Yes No
If so, pre-upgradation classification Substandard Doubtful : D1 D2 D3

A
______________BANK: ZONE :___________ BRANCH :__________________
7.
7. OPERATIONS: (Rs. – Actual amounts rounded off)
a) *Term loans: Instalments (Rs.) Interest (Rs.)
st nd rd th st nd
1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. 1 Qtr. 2 Qtr. 3rd Qtr. 4th Qtr.
Due
Realisation
Interest in arrears: Rs.___________(Period of arrears _________): Installments in arrears: (No.________)Rs._________ (Period of arrears _______________)
[* If more than one Term Loan, please give information for each on the inverse side in the same format]
b. Bills purchased/discounted:(Total outstanding as at year end – Rs.________________________) Bills overdue during the year in excess
Bills overdue* Over 90 days -Details overleaf Rs._________ Interest accrued and accounted on overdue Bills of 90 days
- Other Current Bills Rs._________ Rs. __________________________ Yes No
c) Cash Credit/Other facilities: If yes, particulars on inverse
Account Facility Limit Drawing Power Outstanding Outstanding Interest (Rs.)
No. (Rs.) (Rs.) (Rs.) more than D P Due Realised Unrealised for
@ (Rs.) more than 90 days
- Cash Credit
- Devolved
L/Cs
Total
Other facilities
(@ to be worked out net of trade creditors in relation to stocks and margins as stipulated)
d) Unrealised interest accrued upto 31.3.2018, if NPA according to Bank/Auditor: Current year Rs._____________ : Previous year Rs.____________
e)Right of Recompense, if any, in case of restructuring and sacrifice in the past: Current year Rs._____________ : Previous year Rs.____________

A
______________BANK: ZONE :___________ BRANCH :__________________
8.
e) Particulars/Dates of Irregular Drawings* (Rs.in Lakhs)
Date Limit Drawing Power Outstanding Excess over Reasons for Excess Whether excess Date of
(Rs.) (Rs.) (Rs.) Drawing Limit drawings approval
Power reported to the by
(Rs.) controlling
(Rs.) controlling
Authority Authority
* In case of computerized branches information is available/corroborated from exceptional daily reports generated through the system
f) Summary of Account/Summations: (Rs.in Lakhs)
Cash Credit(Rs.) Overdraft (Rs.) Others(Rs.) Remarks
Opening Balance –Debit at the beginning
of the year
Add: Debit Summations
i) Interest
ii)Others
Total
Less: Credit Summations
Balance outstanding debit as at year end

A
______________BANK: ZONE :___________ BRANCH :__________________
9.
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8. SECURITY/GUARANTEE: (Rs.in Lakhs) Nature of Evidence Is there any indication of
a) Evidence on record for existence and Market value of Security: double financing
Primary: Date Particulars
(indicating date of the latest stock a) Stocks (net of unpaid stocks) YES NO
statements/book debts etc.) b) Book Debts (current debts)
c) Others (specify)
Collateral
(Date of last valuation, Nature of encumbrances, if any )

iii) Insurance coverage. Whether adequate Any other Adverse features
Yes No Yes No
Comment on inadequacy in
Insurance coverage and other
adverse features.
iv)Physical Inspection of securities charged as security: Date of latest inspection Date of last Stock Audit Report
Adverse observations, if any
- Reasons for non-inspection(if more than 6 months)
-Major uncomplied adverse observations in Inspection/

Concurrent audit/stock audit/credit audit on securities

A
______________BANK: ZONE :___________ BRANCH :__________________
10.
v) Guarantees Date of Amount Guarantees (Rs.in Lakhs) *Remarks

Guarantee
Particulars (Rs.) *Invoked(Rs.) Repudiated(Rs.)
Central Govt.
State Govt.
Banks
Financial
Institutions
Others(Specify)
* Besides other observations, reasons for non invoking of guarantees to be given in the remarks column
b) Exceptional reports, if any
on documentation, operations, security/guarantee aspects (whether
and when reported to the supervisory / monitoring authority), or
where the same is pending , or
where the same is pending approval/ authorization)
c) Latest audited statements (including audit report, accounting
policies and notes), whether on record
-Whether there are any qualifications in the Notes/Audit Report
having impact on the financial statements (State effect thereof)
- Whether Cost Audit report(if applicable) received
d) Critical Information
Whether any critical information sought from the borrower
remains uncomplied.

A
______________BANK: ZONE :___________ BRANCH :__________________
11.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OBSERVATIONS OF BRANCH MANAGEMENT (including responses to adverse observations in Reports stated at Item 6 B above)
Documentation
Operations
Security/ Guarantee
Any other matter
Overview of the borrowal account and its operation
10. COMPLIANCE OF TERMS AND CONDITIONS OF SANCTION (Annexure III.1)

11. KEY FINANCIAL INDICATORS FOR THE LAST 3 YEARS AND PROJECTIONS FOR THE YEAR (Annexure III.2)
______________________________________________________________________________________________________________________________________
Signature of Branch Incharge :
______________________________________________________________________________________________________________________________________

A
_____________ BANK ZONE : _______________ BRANCH : ___________________
BANK AUDIT 2017-18

ANNEXURE –III.1 -OBSERVATIONS/STATUS REVIEW ON MAJOR ADVANCES ACCOUNTS FOR THE YEAR ENDED 31.3.2018
Bank: Branch:
Name of Borrower COMPLIANCE OF TERMS AND
Terms and Conditions CONDITIONS OF SANCTION
i) Primary Security
a) Charge on primary security
b) Mortgage of fixed assets
c) Registration of charges with Registrar of Companies
d) Insurance with date of validity of Policy
e) Stock Audit whether conducted-if so when
ii) Collateral Security
a) Charge on collateral security
e) Basis and date of last valuation
iii) Guarantees – Existence and execution of valid guarantees
iv) Asset coverage to the branch based upon the arrangement (i.e. , consortium or
multiple-bank basis)
v) Others:
a) Submission of Stock Statements/ Quarterly Information Statements and other
b) Information Statements.
c) Whether latest audited accounts obtained and analysed including considering effect
d) of qualifications therein.
e) Last inspection of the unit by the Branch officials: Give the date and details of
errors/omissions noticed
In case of consortium advances, whether copies of documents executed by the
company favouring the consortium are available
Any other area of non-compliance with the terms and conditions of sanction.
Note: In case of non/unsatisfactory compliance, action taken by the Bank may be indicated on the inverse side for each item.
(Branch In charge)
31
Bnkad18.sanjay v & mmk
A
___________ BANK ZONE: __________________ BRANCH : _________________________
Borrower : ___________________________________________________
ANNEXURE III.2- Key financial indicators for the last two completed years and projections (Rs.in Lakhs)
Indicators Audited Accounts (year ended) Projected for
31.03.2016 31.03.2017 year
ended
31.03.2018
Turnover
Increase in turnover % over previous year
Profit before depreciation, interest and tax
Less: Interest
Net Cash Profit before tax
Less: Depreciation [*straight line W.D.V ] (*tick as applicable)
Less: Tax
Net Profit after Depreciation and Tax
Net Profit to Turnover Ratio
Capital (Paid-up)
Reserves
Net Worth
Turnover to Capital Employed Ratio
(The term capital employed means the sum of Net Worth and Long Term Liabilities)
Current Ratio
Stock Turnover Ratio
Total Outstanding Liabilities/ total Net Worth Ratio
In case of listed companies, Market value of shares during the year:
a) High
b) Low
c) Closing
** Earning Per Share (Face Value Rs._________)
Whether the accounts were audited? No Yes, upto
If yes, are there any audit qualifications@
** To be based on common denominator of face value of shares :State whether basic: Diluted
@ Audit qualifications may also be stated against item 8 (c) of the form Branch Incharge
32
BANK AUDIT 2017-18 A
ANNEXURE IV – INFORMATION ON PENDING RESTRUCTURING PROPOSALS FOR PROVISIONING
A. PENDING PROPOSALS WHERE THE BOOK OUTSTANDINGS ARE LESS THAN RS. 1.00 CRORE EACH
NAME OF AMOUNT Standard Classification Sub Standard Classification Doubtful Classification
BORROWER OUTSTANDING (Provision to be shown as part of (Provision to be shown as deduction from (Provision to be shown as deduction from
Schedule 5 – Other Liabilities and Advances in Schedule 9 in the Balance Advances in Schedule 9 in the Balance
Provisions) Sheet) Sheet)
Normal Sacrifice FITL Normal Sacrifice FITL Normal Sacrifice FITL
 Normal Provision will be as per the prudential norms applicable to each classification status as determined at the year end
 Sacrifice shall be @ 5% as per the policy adopted by the Bank and as permitted by RBI till 31-3-2017 on amounts comprising book balances which
in the aggregate for all facilities, are below Rs.1.00 crore
 FITL if sought for in the proposal would have to be estimated based on request or based on policy of the Bank in similar cases
B. PENDING PROPOSALS WHERE THE BOOK OUTSTANDINGS ARE MORE THAN RS. 1.00 CRORE EACH
NAME OF AMOUNT Standard Classification Sub Standard Classification Doubtful Classification
BORROWER OUTSTANDING (Provision to be shown as part of (Provision to be shown as deduction from (Provision to be shown as deduction from
Schedule 5 – Other Liabilities and Advances in Schedule 9 in the Balance Advances in Schedule 9 in the Balance
Provisions) Sheet) Sheet)
Normal Sacrifice FITL Normal Sacrifice FITL Normal Sacrifice FITL
 Normal Provision will be as per the prudential norms applicable to each classification status as determined at the year end
 Sacrifice shall be estimated based on the request as per application, pending disposal, or as per the policy adopted by the Bank in respect of similar
proposals
 FITL if sought for in the proposal would have to be estimated based on request or based on policy of the Bank in similar cases
(Note: Provision is recommended to be considered for potential losses, as the borrower’s request would be based on the weaknesses in the accounts
that may cause the account to become in default or potentially not serviced on the terms and conditions applicable to the advance)

33
A
BANK AUDIT (2017-18) - ACCOUNTS SUBJECT TO RESTRUCTURING
ANNEXURE IV – BOROWER-WISE PARTICULARS OF ACCOUNTS SUBJECT TO RESTRUCTURING
BANK___________________________________BRANCH___________________________
NAME OF THE BORROWER CUSTOMER IDENTIFICATION NO
INDUSTRIAL UNITS
CATEGORY CDR NON CDR SME OTHER
WHETHER RESTRUCTURING DONE IN THE PAST YES NO
NO. OF TIMES ACCOUNT RESTRUCTURED First Time Second Time Third Time or
more
DATE OF APPLICATION/PROPOSAL
WHETHER INELIGIBLE FOR SPECIAL REGULATORY TREATMENT AS COVERED BY THE FOLLOWING CATEGORY *
(*If YES in any category, the special regulatory treatment in Restructuring is ineligible)
a. Consumer and personal advances YES NO
b. Advances classified as Capital market exposures YES NO
c. Advances classified as commercial real estate exposures YES NO
d. Other advances (except for changes in provisions related to changes in DCCO in respect of infrastructure YES NO
as well as non-infrastructure project loans (see paragraph 4.2.15 of the Master Circular).@
WHETHER ELIGIBLE FOR RESTRUCTURING BASED ON VIABILITY ETC. YES NO
(refer Para 17.1 of Part B of the Master Circular DBOD.No.BP.BC.2 /21.04.048/2015-156 dated 1-7-2015)
WHETHER ELIGIBLE FOR SPECIAL REGULATORY TREATMENT@
a. NO. OF DAYS ELAPSED SINCE THE DATE OF: Days
Approval under CDR Mechanism (out of 120 days permitted)
Application in other cases (out of 120 days permitted)
(If in excess of the period of 120 days as applicable) Ineligible
b. OTHER CONDITIONS FOR ELIGIBILITY (Clause 20.2.2 of the Master Circular)
c. Is it fully #secured by tangible security ( without considering collateralized intangibles) YES NO
Other than for:
 SSI now (MSE) borrowers, where the outstanding is up to Rs.25 lakh; and
 Infrastructure projects, provided the cash flows generated from these projects are adequate for repayment
of the advance, the bank has in place mechanism to escrow the cash flows, with clear and legal first
claim thereon.
ii. Will the unit become viable in YES NO
 8 years, if it is engaged in infrastructure activities
 5 years in the case of other units.
iii Does the repayment period of the restructured advance including the moratorium, if any, exceed YES NO
 15 years in the case of infrastructure advances and
 10 years in the case of other advances including restructured home loans;
iv Has a minimum of 20% of banks' sacrifice or 2% of the restructured debt been brought in by the Promoters@@ YES NO
v Has personal guarantee been obtained from the promoter except when the unit is affected by external factors YES NO
pertaining to the economy and industry.
vi Is the restructuring under consideration a 'repeated restructuring' **as defined YES NO
@ARE ALL THE ABOVE CONDITIONS (a+b) SATISFIED AND BORROWER IS ELIGIBLE FOR SPECIAL YES NO
REGULATORY TREATMENT IN COMPLETED PROPOSALS
CLASSIFICATION OF BORROWER (Tick as applicable) STANDARD SUB STD. DOUBTFUL
On Date of Application
Upon Restructuring
DATE OF COMPLETION OF RESTRUCTURING
WHETHER BORROWER UPGRADED YES NO
CLASSIFICATION STATUS AND PROVISIONS FOR COMPLETED CASES Annexure A
WHETHER PROPOSAL/APPLICATION PENDING ON 31-3-2017 YES NO
CLASSIFICATION STATUS AND PROVISIONS FOR PENDING CASES Annexure B
NOTES: (@Refer Para 20.2.3 regarding withdrawal of Special Regulatory Treatment for Asset Classification withdrawn with
effect from 1-4-2015 with the exception of provisions related to changes in DCCO in respect of infrastructure as well as non-
infrastructure project loans (also refer paragraph 4.2.15).
1. #Fully Secured (refer Annexure5 of the Master Circular)- *When the amounts due to a bank (present value of principal and
interest receivable as per restructured loan terms) are fully covered by the value of security, duly charged in its favour in respect
of those dues, the bank's dues are considered to be fully secured. While assessing the realisable value of security, primary as
well as collateral securities would be reckoned, provided such securities are tangible securities and are not in intangible form like
guarantee etc., of the promoter / others. However, for this purpose the bank guarantees, State Government Guarantees and
Central Government Guarantees will be treated on par with tangible security.
2. **When a bank restructures an account a second (or more) time(s), the account will be considered as a 'repeatedly restructured
account'. However, if the second restructuring takes place after the period up to which the concessions were extended under the
terms of the first restructuring, that account shall not be reckoned as a 'repeatedly restructured account
3. @@Promoters' sacrifice and additional funds brought by them should be a minimum of 20 per cent of banks’ sacrifice or 2
per cent of the restructured debt, whichever is higher. This stipulation is the minimum and banks may decide on a higher
sacrifice by promoters depending on the riskiness of the project and promoters’ ability to bring in higher sacrifice
amount. Further, such higher sacrifice may invariably be insisted upon in larger accounts, especially CDR accounts. The
promoters’ sacrifice should invariably be brought upfront while extending the restructuring benefits to the borrowers.
The term 'bank's sacrifice' means the amount of ';erosion in the fair value of the advance'; or “total sacrifice”, to be
computed as per the methodology enumerated in para 17.4.2 (i) and (ii) of the Master Circular.
4. Restructuring includes reschedulement, re-phasement , nursing or rehabilitation, not as part of a universal policy applicable to
any class/category of advances, but specific to a borrower who seeks restructuring as he is incapable of servicing the advance
on the sanctioned terms.
5. Completed Restructuring proposals are to be reported in Annexure A and those pending as at the year end in Annexure B
34
A
Bank______________________________Branch:____________________ ANNEXURE A
ADVANCES WHERE RESTRUCTURING AS AT 31-3-2018 IS COMPLETE
Borrower____________________________ Customer Identification No___________
CREDIT PRE RESTRUCTURING (Amt. Rs.) POST RESTRUCTURING (Amt. Rs.)
FACILITIES (upgrade only if eligible for special
regulatory treatment-DCCO related –refer
Para 4.2.15 of the Master Circular)
NPA NPA
SUB SUB
STANDARD STANDARD DOUBTFUL STANDARD STANDARD DOUBTFUL
Bills
Cash Credit
Overdraft
Invoked
Guarantees
Other Demand
Loans
term loans
FITL
Additional/fresh
facilities
(post restructuring)
Investments
other than Equity
Instruments
Total
Interest XXXXXXX XXXXXXX XXXXXX
Suspense
Unapplied XXXXXXX XXXXXXX XXXXXX
Interest
Right of XXXXXXXX XXXXXXX XXXXXXX XXXXXX
recompense
PROVISIONS
Normal (A)
On Additional
funding (A.1)
Total (A+A.1)
Sacrifice (B)
FITL (C)
TOTAL
@ DISCLOSURE Other Reduction from Other Reduction from
OF PROVISIONS Liabilities Advances Liabilities Advances
Normal
Sacrifice
FITL
TOTAL
@ Disclosure of Provisions
Provisions
 Other Liabilities, if in Standard Classification (Normal and on additional finance for a period of one year)
 To be reduced from Advances, if in NPA Classification(including Additional funding, where it slips to NPA)
Sacrifice*
 Other Liabilities , if in Standard Classification
 To be reduced from Advances, if in NPA Classification
(* To be computed @ 5% of the aggregate outstanding as per accounts)
FITL (100% to be retained even if accounts upgraded to Standard) to be held in a separate account styled
"Sundry Liabilities Account (Interest Capitalization)"
 Other Liabilities, if Amounts in Standard Classification (Normal and on additional finance for a period of one
year)
35

A
Bank_____________________________________Branch:____________________
ADVANCES WHERE RESTRUCTURING AS AT 31-3-2018 IS PENDING ANNEXURE B
Name of Borrower Customer Identification No.
CREDIT PRE RESTRUCTURING STATUS PRE RESTRUCTURING STATUS
FACILITIES ON THE DATE OF PROPOSAL (Amt. Rs.) AS AT 31-3-2018 (Amt. Rs.)
NPA NPA
STANDARD SUB STANDARD SUB
STANDARD DOUBTFUL STANDARD DOUBTFUL
Bills
Cash Credit
Overdraft
Invoked
Guarantees
Other Demand
Loans
Term loans
FITL
Investments
other than Equity
Instruments
Total
Interest
Suspense
Unapplied
Interest
PROVISIONS
Normal (A)
Sacrifice (B)
FITL (C)
TOTAL(A+B+C)
@DISCLOSURE Other Reduction from Other Reduction from
OF PROVISIONS Liabilities Advances Liabilities Advances
Normal
Sacrifice
FITL
TOTAL
@ Disclosure of Provisions
Provisions (Normal)
 Other Liabilities, if amounts in Standard Classification
 To be reduced from Advances, if in NPA Classification(including Additional funding, where it
slips to NPA)
Sacrifice*
 Other Liabilities , if in Standard Classification
(*To be computed @ 5% of the aggregate outstanding as per accounts)
FITL
 Other Liabilities, if in Standard classification
 The estimated amount may be considered equal, at least to the Interest Suspense in case of NPAs.
36

A
BANK AUDIT (2017-18) – ANNEXURE V
INFORMATION PURSUANT TO THE SCHEME FOR SUSTAINABLE STRUCTURING FOR STRESSED ASSETS
1. Disclosures on Flexible Structuring of Existing Loans

Amount in INR Crores
Period No. of Borrowers Amount of loans taken up for Flexible Exposure weighted average
taken up for restructuring duration of loans taken up for
Flexible flexible restructuring
restructuring Classified as Classified as NPA Before applying After
Standard flexible applying
restructuring flexible
restructuring
Previous financial
year
Current financial
year (From April
to__________)
2. Disclosures on Strategic Debt Restructuring Scheme (accounts which are currently under the stand-still period)
No. of accounts Amount outstanding as at the Amount outstanding as at the reporting date with respect to
where SDR has reporting date accounts where conversion of debt to equity
been invoked Classified as Classified is pending has taken place
Standard as NPA Classified as Classified as Classified as Classified as
Standard NPA Standard NPA
3. Disclosures on Change in Ownership outside SDR Scheme (accounts which are currently under the stand-still period)
No. of Amount outstanding Amount outstanding as Amount outstanding as Amount outstanding as
Accounts as on the reporting on the reporting date on the reporting date on the reporting date
where the date with respect to accounts with respect to accounts with respect to
Bank has where conversion of where conversion of accounts where
decided to debt to equity/invocation debt to equity/invocation change in ownership is
effect of pledge of equity of pledge of equity envisaged by issuance
change in shares is pending shares has taken place of fresh shares or sale
ownership of owners’ equity
Classified Classified Classified Classified Classified Classified Classified Classified
as as NPA as as NPA as as NPA as as NPA
Standard Standard Standard Standard
4. Disclosures on Change in Ownership of Projects Under Implementation (accounts which are currently under the stand-
still period)
No. of project loan accounts Amount outstanding as on the reporting date
where banks have decided to Classified as Standard Classified as Standard Classified as NPA
effect change in ownership restructured
5. Disclosure on the Scheme for sustainable restructuring of stressed assets (S4A), as on__________
No. of Accounts where Aggregate amount Amount Outstanding Provision held
S4A has been applied outstanding In Part A In Part B
Classified as Standard XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXX
Classified as NPA XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXX
Branch Management
37
Bnkad18. Sanjay v & mmk

BANK __________ ________ Zone:_________________: Region____________: Branch ___________ A
ANNEXURE VI - STATEMENT OF MATURED /OVERDUE /UNCLAIMED DEPOSITS AS AT 31-3-2018
Particulars Rupee Deposits@ FCNR(B)
FIXED/TERM DEPOSITS SAVINGS BANK CURRENT ACCOUNTS TOTAL RUPEE DEPOSITS (Converted to Rupees at year
ACCOUNTS end exchange rates)
No. Amount(Rs) No. Amount(Rs) No. Amount(Rs) No. Amount(Rs) No. Amount(Rs)
Opening Balance at the beginning (A)
Additions during the year (B)
Total (A+B)
Less: Deposits renewed/repaid (C)
Overdue/Unclaimed deposits as at
year-end (A+B-C)
No. and Amount of NRNR Deposits, if
any, included above
Break-up of overdue deposits(period-
wise)
Less than 1 year
1-3 years
3-5 years
5-10 years
Over 10 years
TOTAL
Fixed Deposit Receipts held in
physical custody by Bank
INTEREST PROVISION
1. Provision for Interest accrued till
the year end and on the above
overdue/unclaimed deposits
2. On deceased depositors
– Unclaimed Current Accounts
TOTAL INTEREST PROVISION
@ including FCNR (B) matured deposits crystallized in Rupees
BRANCH MANAGEMENT

__________________ BANK BRANCH: __________________________
Annexure VII - LIST OF ENTRIES ORIGINATING PRIOR TO 31.3.2018 (AT OTHER BRANCHES) AND RESPONDED AT THE BRANCH AFTER 31.3.2018 A
(This will result in MOC)
Date of Responding ORIGINATING ENTRY AT OTHER BRANCHES Head of Account affected at the Branch Amount
entry after 31.3.2018 at (based on entries responded after 31-3-2018)
the Branch
Branch Name Date of Debit to Credit to
originating entry
Code Head Code Head Rs. P
Branch Management
39

A
BANK BRANCH AUDIT (2017-18)
ANNEXURE VIII - LFAR REQUIREMENTS DESERVING SPECIAL ATTENTION
a) Balance confirmation certificates and reconciliation statements with banks indicating

reasons for unadjusted old entries outstanding between 6 months and 1 year, and those
over 1 year old.
b) Responses to Para I.4 of the questionnaire, if and to the extent applicable to the branch.
c) Status of “large advances*” in the light of the reporting requirements as per Item I.5 of the
questionnaire.
(*defined as those in respect of which the outstanding amount is in excess of 5% of
the aggregate advances of the branch or Rs.2 Crores, whichever is less).
d) Data as per the format in Item I.5 (d) (xii) of the questionnaire, relating to
(i) credit guarantee claims, and (ii) subsidies.
e) Particulars of cases of compromise/settlement and write off involving write offs/ waivers in
excess of Rs.50 lakhs.
f) Information [as per item I.5 ( e) of the questionnaire], in a tabulated form as regards
guarantees invoked, letters of guarantee and co-acceptances.
g) Information as per Item I.6 (b) of the questionnaire

h) Details as per the format [ II.2(i) of the questionnaire]
i) List of contingent liabilities not acknowledged as debts in response to item II.3 of the
questionnaire.
j) Statement of divergent trends in major items of income/ expenditure as compared to the

previous year with explanation thereof. Items comprising interest earned on advances and
that paid on deposits may preferably be computed on the basis of monthly average
advances/ deposits for the branch and the current and previous year for comparison.
k) Note on areas of computerisation and Bank’s instructions/guidelines covering matters in
Item IV. (1)(b) of the questionnaire.
l) Statement in response to Item IV. 2 of the questionnaire.
m) List of outstanding debits, if any, in H.O. Account in respect of Inter-branch transactions.
n) Inter-branch Adjustments
o Particulars/status of unresponded/ pending/ uncomplied queries or communications from
the designated offices as regards unmatched items in Inter-branch Adjustments.
o List/status of outstanding old/ large entries at debit comprising Inter- branch Items.
o) Statement of particulars of frauds discovered during the year, as per the prescribed format.
p) Evidence of reconciliation of records of fixed assets, (with a confirmation as to their

updation) with physical inventories last taken.
q) Documents of title of the branch premises, if maintained at the Branch, for production to
auditors.
r) Information/ responses to the questionnaire, if a specialized branch (Refer Appendix – Item

A.3 in particular).
s) Information in the structured format in response to Item B of the Appendix covering

advances, each in excess of Rs.2 crore. (Refer Annexure III)
t) Information in respect of borrowers pursuant to Item C of Appendix.
u) Details of Inward/outward clearing as per the prescribed format (per D2 of the Appendix).
40

A
BANK: BRANCH: ____________________
ANNEXURE IX - BRANCH DATA FOR THE YEAR ENDED MARCH 31, 2017 FOR VERIFICATION OF SLR UNDER SECTION 24 OF B.R. ACT, 1949
(Amount (Rs.’000)
Dates (odd Deposits in Current Cash in Hand Balances in Current Accounts with
dates Accounts from Banks (SBI, RBI @SBI @@Subsidiaries of Nationalised Total
specified) and its Subsidiaries, Public SBI Banks Balances
Sector/Nationalised Banks)
@not applicable to SBI Branch audit:@@ not applicable to the particular subsidiary of SBI
BRANCH MANAGEMENT
41

B
BY HAND
March 30, 2018
The Branch Manager,
_____________Bank,
Dear Sir,
Re: Audit of Accounts for 2017-18.
We are deputing our team headed by Mr. _____________ in connection with the verification of the
following, at the close of business on 31.3.2018 (Friday):
A .Cash balances etc.

a) Cash in hand (including with tellers); b) Cash at sub offices
c) Cash in ATM(s),if operated/controlled; and, if any, with authorized agencies for replenishment;
d) Petty Cash/imprest balances; e) Postage in hand; f) Tokens, if any
g) Foreign Currency, if any. h) Demonetised currency, if any (reasons for holding of
i) Gold, if any which may be given)
In connection with the above, please ensure that you will be getting the verification done
simultaneously, and at all locations, of the balances for the aforesaid items and produce for our
verification the following:
a) Foreign Currency parcels, if any, lying at the Branch.
b) Sealed covers containing cash, if any.
c) Petty Cash and imprest balances held with various officers.
d) Reconciliation of the book balance with that at the ATM, in case of any difference.
B. Security Paper Stationery/ Forms (Unused/ blank) and those issued, but in hand
1. We would be undertaking the physical verification of the unused/blank security paper
stationery/ forms lying at the branch, including for the following:
a) Time/Term Deposits; b) Deposits under various schemes; c) Travellers' Cheques;
d) Drafts; e) Pay Orders/Banker's Cheques, Gift cheques, etc; and
f) Cheque Books/Withdrawal Slips
We would request you to keep ready, a list of stock of all stationery in hand of the nature and
type referred to above, so that verification thereof is expedited; and further ensure that the
relevant registers are upto date to enable us to examine the balances therein.
2. Instruments of the above nature issued but lying in physical custody of the Branch may be listed and
got verified
C. Bills for Collection/Purchased:

All bills in hand (for collection as well as purchased) may be listed out and got physically verified.
D. Fixed Deposit Receipts in physical custody of the Branch, in respect of Deposits received or
renewed (refer Para 6 of Annexure I Section A of our earlier letter):
Such undispatched Receipts in the physical custody at the Branch may be produced, indicating the
number and amount thereof.
E. Your formal confirmations for our record:

Upon completion of the exercise involving physical verification as aforesaid, we would request
you to let us have a confirmation of the balances as at the close of the business as at the
year-end duly signed by the authorised signatories.
F. External Confirmations
May we request you obtain and to let us have, balance confirmation certificates in respect of:
a) balances with other banks as at the year-end along with reconciliation statements, in
evidence of outstandings with such banks (including, if any, with the Reserve Bank of India);
b) borrowings, if any, recorded at the Branch (banks/ institutions)
We expect these certificates/ reconciliation statements, duly authenticated, to be handed over along with
the Branch returns.
We shall be thankful for your co-operation.

Yours faithfully,

BANK BRANCH AUDIT PROGRAMME (2017-18) C
1. Bank: Branch:
2. Year Ended 31st March, 2018
3. Audit In-charge :
4. Audit Assistants: Name Signature
1.
2.
3.
4.
5.
5. Audit commenced on : Completed on :
6. Submission of Reports Date of Submission
a) Statutory Audit Report
b) LFAR
c) Tax Audit Report
d) Certificates:
i.DICGC Claims
ii Subsidy claims under Prime Minister’s Rojgar Yojna for Unemployed
Youth (PMRY)
iii Data on 12 odd dates for verification of SLR
iv Exposure to Sensitive Sectors
v Implementation of the Ghosh/ Jilani Committee recommendations
vi Movement chart of NPAs and provisions
Other Certificates required by bank (Specify)
 Information on restructuring of Advances
 Interest Subvention to Short term agricultural credit and produce
marketing loans
 Interest claimed under TUFS – SSI/SME Sector
 Credit linked Capital Subsidy Scheme
 Interest subsidy on educational loans

Remarks
1
C
BANK BRANCH AUDIT PROGRAMME 2017-18
S. No HEAD /SUB HEAD OF ACCOUNT OBSERVATION SIGNATURE
WHETHER IF ADVERSE, OF
YES NO SCHEDULE ASSISTANT
NUMBER/
REFERENCE
LIABILITIES – DEPOSITS XX XX XX XX
1 KYC NORMS –
Whether there are any adverse observations in internal
monitoring/ supervisory reports in respect of deposit
accounts - at the time of opening of accounts or in
updating data
2 Have the outstanding balances of deposits been
disclosed to conform to the legal requirements
3 Are there major variations in the comparative figures of
deposits as compared to those of the earlier year that
need to be enquired into
4 Has the branch observed unauthorised overdrafts or
adverse balances in deposits, which required ratification;
and have such accounts been reported to the controlling
authority as required
(Note: This can be observed from the Daily Exception
Reports during and at the year end)
5 LARGE/UNUSUAL TRANSACTIONS – XX XX
Is there a system of identifying, recording and reporting :
a. Cash transactions, in excess of prescribed amounts,
per transaction or in aggregate per day
b. Unusual transactions
c. Have any such large/unusual transactions not been
reported during the year or belatedly reported
d. Does the bank have a system of identifying and
recording of accounts of staff and their relatives,
particularly those requiring preferential treatment as
regards interest, and
Have there been any large or unusual transactions
observed/reported in such accounts
(Entries found based on the basis of Daily Exception Reports
need to be listed, stating the names, dates of entries and the
amounts involved, in respect of items at a to d above)
6 STAGNANT, DORMANT , INOPERATIVE ACCOUNTS XX XX
a. Is there a system of control over accounts that become

stagnant, inoperative or dormant and for revival of
these to make them operative
b. Are there any adverse matters reported where such
system has not been followed
c. Has the branch satisfactorily explained the debits/
withdrawals from stagnant / inoperative and dormant
accounts
7 INTERNAL CONTROLS
a. Is there a system laid down for custody and control
over issue of cheque books, withdrawal slips or of
recording authority to debit deposit accounts
b. Have any non compliance of the system been reported
in the internal laid down system
c. Is there a system of electronic or other direct/immediate
communication to customers while processing of
transactions , particular large debits to their accounts

C
NUMBER/
REFERENCE
d. Are there any reported / recorded customer complaints

for unauthorised debits / operations in their accounts
or disagreement in respect of such transactions or
account balances
e. Are there any adverse observations in any internal
monitoring/supervisory reports as regards the above
having effect on the closing balances or requiring
recording of claims
8 INTEREST COMPUTATION
a. Has interest computation been made at the rates for the
time being in force applicable to various categories of
deposit accounts
b. Has any interest variation been reported in any
monitoring/supervisory internal report(s), including in
internal/concurrent/revenue audit report that warrants
additional procedures to check interest computation
9 CURRENT ACCOUNTS
a. Have you verified that current deposits also include
unpaid/matured term deposits, and those unclaimed as
at the year end
b. Are there any accounts held as current deposits,
including overdue and matured deposits, on which
interest is payable but has not been provided (e.g., in
respect of deceased depositors, sponsored RRBs
where the bank is permitted to give interest) has the
branch prepared the details and quantified the liability
upto the year end, to the extent the provision for
interest is required (check details for reporting)
c. Review three accounts with the highest summations
during the year to determine whether there are any
reportable unusual, large or cash transactions
(Note down the names and observations, if any)
d. Review three staff related accounts
(Note down the names and observations, if any)
e. Are there any large transfer entries towards the end of
each quarter, crediting any advances accounts, that
warrant enquiry and reporting
(Obtain details for record and reporting)
f. Are there any debits in any current accounts that are
dormant/inoperative / stagnant and whether there are
satisfactory explanations to such debits/withdrawals
(Obtain details for record and reporting
unsubstantiated debits )
g. Have you recommended, in the LFAR, that old,
stagnant, unclaimed amounts are centralised

C
NUMBER/
REFERENCE
10 SAVINGS BANK ACCOUNTS

a. Are there any savings bank accounts at the branch that
are on the negative list of the Bank /RBI
(List the details and amount)
b. Quantify for reporting, any interest paid/provided on
such impermissible accounts and what is the amount
so paid/provided
c. Based on accretion of interest on daily balances,
whether the liability till the year end, has been
computed and disclosed as that accrued and due (for
the period since the last application of interest in
individual accounts)
(If not, obtain details for reporting)
d. Ascertain that interest accrued till the year end is not
included in “Other Liabilities”
11 FIXED/TERM/TIME DEPOSITS XX XX
A. TERM DEPOSITS – Banks and Institutions XX XX
a. Have confirmation certificates from banks/ institutions,

confirming the deposits, been received and checked
b. Have you checked whether the deposits are in round
figures – and if not, have you ascertained the reasons
for the amounts disclosed in odd figures
c. Has interest “accrued and due” on such term deposits
been checked
B. OTHER DEPOSITS
a. Does the bank have a system of automatic renewal of
term deposits on maturity thereof
i.on rupee denominated deposits
ii.on FCNR (B) - Foreign Currency denominated
deposits
b. Do term deposits disclosed as per branch balance
sheet, include any:
i. matured deposits in respect of which there are no
instructions for renewal, (including prior to the cut
off date when the system for automatic renewal of
deposits was introduced), or
ii. old or unclaimed deposits
(Report amount of such deposits that require to be
included as part of current deposits and not as part of
term deposits, as per RBI guidelines)
c. Are there any old deposits, before a cut off date, which
are not subject to auto renewal of deposits
if yes, whether interest is provided thereon
(Check basis and amount of interest provided)
d. In case of auto renewal of deposits, are these renewed
net of tax deduction at source
(If not, report defaults)
e. Does the branch issue term deposit receipts to
depositors on receipt / renewal of deposits as per RBI
guidelines

C
NUMBER/
REFERENCE
f. Report number and amount of term deposits in respect

of which deposit receipts are not issued as under:
i. deposit receipts not issued
ii. deposit receipts issued but not delivered (and
lying with branch officials)
iii. deposit receipts in respect of which renewals have
been made by endorsements on the inverse
thereof (Report whether Branch maintains record
of such renewals by endorsement)
Notes:
i. Loss of control over credits in respect of Deposits increase
audit risk and must be reported in the LFAR as a fraud
prone area, particularly if the system is lax or items are
incapable of audit trail.
ii. Credits representing deposits, including by mere book
adjustments on renewal through the computer system, not
backed up by issuance of receipts must be reported, as
such credits are prone to the risk of fraud, due to the
possibility of misuse thereof.
12 INTEREST ACCRUED ON DEPOSITS XX XX
a. Has interest accrued and due (net of tax deduction at

source, as applicable), on various categories of rupee
denominated deposits been shown as part of deposits
(TDS is required to be shown as part of “Other
Liabilities” and not part of Deposits)
b. Has interest computation been done as per RBI
guidelines for FCNR (B) deposits from the date of
receipt till maturity to arrive at the maturity proceeds
and pro rated till the year end on all continuing
deposits
c. Has provision been made for interest accrued but not
due (including on FCNR (B) deposits , and shown as
part of “other liabilities – interest accrued” as required
to be shown in schedule 5 of the Bank’s Balance
Sheet
(Report Interest accrued and not due, if included as
part of Deposits)
d. Has interest provision been made on old, unclaimed
and deposits matured but in which renewal
instructions have not been received, including in case
of deceased depositors, as per applicable guidelines.
13 FOREIGN CURRENCY DENOMINATED DEPOSITS XX XX
Are there any inoperative FCNR (B) fixed term maturity

and non fixed term maturity deposits , which require to be
crystallised to rupee denominated deposits as per clause
2.7 of the RBI master circular dated 1-7-2015
14 ADDITIONAL PROCEDURES (If any)

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LIABILITIES – BORROWINGS (in case the branch has XX XX

borrowings)
1 If there are any amounts of the nature of borrowings
recorded at the branch, has the head office/controlling
authority authorised the branch to borrow or seek
refinancing or retain any amounts as borrowings
(including refinance)
2 Check that the disclosure of borrowings has been
properly made in the branch balance sheet and is in
agreement with the books
3 Obtain certificates / confirmations and verify the
borrowings with reference thereto in respect of:
a. Reserve Bank Of India
b. Other Banks
c. Other Institutions and Agencies
d. Industrial Development Bank of India
e. Export Import Bank of India
f. National Bank for Agriculture and Rural Development
g. Others ((Specify in the Audit File))
4 INTEREST ACCRUED XX XX
Check that interest is correctly computed till the year end

and is shown as part of the borrowings if the same is due
5 REPORT XX XX
a. Amounts, if not in the nature of borrowings/refinance

b. If the amount of the borrowings is not evidenced by
confirmation certificates and/or is unreconciled or
wrongly stated
c. If there is wrong disclosure of the borrowings as
secured and unsecured
d. If it includes amount of participation certificates (on
risk sharing basis, not netted from related advances)
e. Amount of interest accrued and due, if wrongly
computed, and not shown as part of the related
borrowings
f. Amount of interest accrued and not due, if included
under the head borrowings
g. VOSTRO balances wrongly grouped under borrowings
instead of deposits
h. NOSTRO (adverse book balances) wrongly grouped
under borrowings instead of deposits
i. Credit balances wrongly included under borrowings
6 OTHER PROCEDURES (If any)

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LIABILITIES -OTHER LIABILITIES AND PROVISIONS

1 a. Bills Payable (Applicable where entries are retained at
branches)
b. Enquire into old/large outstandings which remain
unresponded / unadjusted
c. Are there any unlinked debits (on account of drafts paid
without advice/ex advice) appearing in the accounts
(and which require management representation as to
the reasons for such entries)
d. Enquire into any inward pending communication from
the controlling authority, as regards entries originated
earlier from the branch but that may not have been
adjusted at the centralised level
e. BANKERS CHEQUES /PAY ORDERS/ SLIPS XX XX
i Are there any bankers cheques /pay orders/ slips

outstanding as at the year end
ii Check the outstanding entries in bankers cheques
and pay orders, based on the following particulars to
be obtained
Particulars Bankers cheques Pay orders/slips
No. Amount No. Amount
Within 6 months
6 months - 1 year
1-2 years
2-3 years
3 years and above ___ ________ ___ _______
TOTAL
___ ________ ___ _______
iii. Has test check been made for large and other
unusual/suspicious debits to ensure that there is
no frequent cancellation and re-issue of such
instruments, particularly if the names of the
payees is repetitive
iv. Seek confirmation for, and report in LFAR
 Instruments issued but not handed over or
those not dispatched (particularly Banker’s
cheques/Pay Orders)
 Reasons as to why the old balances cannot be
frozen and transferred to a centralized office to
avoid risk of misuse of the credits.
 the risk of misuse of these, if not covered by
proper Internal control system or dual control
2 INTEREST ACCRUED
(comprises interest accrued and NOT DUE on Deposits
and Borrowings)
a. Has it been checked and verified if interest accrued and
due is included under this sub head, particularly in
respect of savings bank accounts
b. Has interest been considered on a pro rata basis till the
year end on FCNR (B) continuing deposits
3 OTHERS (including Provisions):
a. Check balance and computation of advance payments
and unexpired discounts (Rebate on Bills Discounted,
which comprise entries pertaining to the period after
the year end )

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b. Unless otherwise directed by central/head office of the

bank based on written instructions, have the year end
liabilities /provisions been made, and if not, whether
MOC (forming part of the main report) has been
recommended in respect of
 Rent (as per contractual obligations)
 Rates and Municipal taxes and other local levies
 Electricity and Power bills,
 Telephone, Telegrams, telex etc.,
 Interest payable on Staff security deposits
 Payments and provisions for employees
 Repairs/maintenance bills,
 Travel and other expenditure of the employees for
which advances may have been given and not yet
adjusted
 Professional fees and charges relating to
outsourced Concurrent audit/Internal audit
/Revenue audit /stock audit and other similar
services
 Outsourced security, computer maintenance and
servicing charges
 Depreciation/amortization in respect of assets
acquired , but in respect of which liability has not
been adjusted in full
 Other Expenditure pertaining to the year end,
recorded in the post balance sheet period.
c. Whether known liabilities pertaining up to the year end ,
if unadjusted have been reported through MOC in
respect of
 Items of fixed assets acquired and other capital
expenditure (e.g., progress bills for premises
under construction /renovation
 Other contractual obligations
 Any other expenditure or obligation that may
have been reported in the latest concurrent
/internal audit report
d. CASH MARGINS XX XX
 Report if cash margins have not been actually

realised and held against bills purchased and
discounted and not by lien marking of current
accounts
 Check and report margins contractually agreed
upon but not maintained with the bank or where
these are released without any basis where
guarantee/letters of credit or other similar
obligations have not yet ceased

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ASSETS - CASH AND BALANCES WITH RESERVE XX XX

BANK OF INDIA:
1 CASH XX XX
a. Has physical verification been done at all locations/sub offices
attached to the branch in respect of balances comprising
cash:
At the year end
On first branch visit (Date____________)
During the course of Audit (Date____________)
 Cash in Hand
 Foreign Currency Notes (including inward currency parcels
originated from other branches/offices)
 Petty Cash/Imprest Balances (including with staff)
 Postage (cash) balances
 Tokens
 ATM Balances with reference to the ATM scrolls/tapes
 Recorded after the year end cash remittance in transit
originated by another branch/office on or prior to the year
end but
b. Has a certificate/confirmation been obtained and kept on
record of the balances physically verified
c. Do the balances physically verified tally with the year end
balances as per books.
if not, have the discrepancies been reported in the MOC
d. Does a review of the cash transactions on the last two days of
each calendar quarter reveal any unusual/large movement of
cash that deserves to be reported, whether or not amounting
to window dressing
(These would include heavy cash deposits at the year end and
immediate withdrawals the very next day, particularly in
Advances accounts that may otherwise be in default)
e. In respect of the ATM attached to the branch, have the
differences of cash in ATM and that as per books been
reconciled and considered in the MOC
Where cash of the branch is held with agencies for cash
stuffing/replenishment, has a confirmation certificate been
obtained from the agencies concerned and tallied with the
books as at the year end
(Consider in Main Report as also elaborate in LFAR)
f. Does the branch carry cash far in excess of the norms fixed or
of normal requirements, particularly if has a currency chest
attached to the branch or has easy access to cash as per
arrangements with another bank in the immediate vicinity.
(Consider in LFAR)
g. Is the branch following the system of dual control with periodic

verification of cash
h. Does the branch carry soiled /non exchangeable notes
i.Does the Branch hold any demonetized currency notes.
REPORT
j. Have large cash transactions generated through

“Exception Reports” been reviewed and reported to the
controlling authority (Report unusual items)

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2 BALANCES WITH RESERVE BANK OF INDIA (RBI) XX XX
Does the branch maintain account(s) with RBI

A. Where branch maintains account(s) with RBI
a. Have the year end balances been verified with reference
to the confirmation certificates/ statement of accounts
received from RBI
b. Are there any differences between the RBI balance
confirmations and the branch books and whether these
have been reconciled
c. Have MOCs been recommended for differences
comprising:
 Entries originated by RBI at debit/credit prior to ,
but which have been recorded after, the year
end
 Entries at debit /credit wrongly recorded in the
books of the branch prior to the year end, but
which require reversal
d. Has interest accrued upto the year end on balances
with RBI, been adjusted in the books of the branch
(including where formal entries in RBI statements are made
after the year-end).
e. Check and report through MOC, on a value date basis,
currency chest withdrawal/deposit entries originated at
other branches prior to, but recorded in the branch
books after, the year end (Inter branch)
f. Report unadjusted claims from RBI that require
provision
B. Where the branch does not maintain account with RBI
(and there is a currency chest attached to the branch)
a. check whether all transactions for withdrawals from,
and deposits into the currency chest maintained have
been duly reported on the same date to the linked
branch where the RBI account is maintained
b. check if there are any claims by RBI for defaults in the
operation of the currency chest, and has this been
reported in the audit report

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ASSETS - BALANCES WITH BANKS AND MONEY AT

CALL AND SHORT NOTICE
1 BALANCES WITH BANKS – Current Accounts
a. Obtain confirmations from each bank as to year end balances
in respect of current account maintained
b. Does the balance in the branch books tally with that on the
confirmation received from the other bank
c. Has a reconciliation statement been prepared
d. Has MOC been prepared for debits/credits originated at other
banks prior to but responded by the branch after, the year
end, based on:
 old/large unadjusted outstanding entries particularly at
debit;
 cash transactions remaining unresponded; and
 items of revenue nature not adjusted.
e. Have entries over one year old as at the balance sheet date
been noted for LFAR and provision recommended through
MOC:
No. of Entries Amount(Rs.)
- Debit
- Credit
2 ADDITIONAL PROCEDURE (if any)

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3 NOSTRO BALANCES
a. Is the branch designated to maintain NOSTRO accounts
b. If so, have balance confirmations/ statements been
obtained in evidence of the year end balances
c. Are there entries originated by banks overseas that appear
in the reconciliation statements
d. Has MOC been prepared for items in reconciliation
e. Are there old balances at debit/claims made in NOSTRO
that require provisions through MOC to be recommended
f. Have the year end balances been converted at the rates
notified by the controlling authority in the bank
g. Are entries in NOSTRO Accounts pertaining to funding by
overseas banks against Letters of Undertaking (Trade
Credits) and corresponding outflows’ being recorded in the
books of the Bank
(Report amounts not recorded)
4 BALANCES WITH BANKS – DEPOSIT ACCOUNTS
a. Obtain confirmations from each bank as to year end balances
in respect of deposit account maintained
b. Are the balances of deposits in round figures
c. If not in round figures , have the reasons been ascertained
(e.g., deposit renewals with interest)
d. Has interest accrued and receivable been adjusted on the
deposits till the year end
ASSETS - BALANCES WITH BANKS AND MONEY AT

CALL AND SHORT NOTICE
5 Money At Call And Short Notice (At designated branches)
Is the branch authorised to keep money at call and short notice
If so, have confirmations been obtained and checked from:
Banks
Other Institutions
Has interest computation been checked and adjusted at the
contractual rates agreed

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ASSETS - INVESTMENTS:
[NOTES: 1.Generally investments are dealt with on a
centralised basis and verification procedures
on behalf of the office may be restricted to
certain branches only.
2. If the above procedures are not applicable at
the Branch, if may be so indicated.]
1 WHERE INVESTMENTS ARE HELD AT THE BRANCH: XX XX
a. Has the list of investments held on behalf of the head office,

been obtained and checked with the branch records
b. As at the year end, are there any pending adjustments for
purchases/sales on value date basis , if required to be
adjusted at the branch
c. Are there any matured/redeemable investments in respect of
which proceeds have not been received and recorded at the
branch on behalf of head office
d. Have the category-wise investment holdings been verified
with reference to
 Holding certificates where these are held by others
 Depository confirmations/statements where these are in

demat form
 Physical verification procedures
 Allotment letters/documentary evidence for holdings

where the related securities are not held
e. Has the certificate of holdings been issued based on the
verification procedures adopted
f. Does the certificate clearly state discrepancies in the holding
and as per the head office list
2 WHERE VALUE OF INVESTMENTS IS RECORDED AT THE
BRANCH (OTHER THAN THE TREASURY BRANCH):
a. Does the branch have authority to record and deal with
investments
b. Have the purchases/sales been authorised and recorded on
value date basis
c. Have holdings been verified at the year end and tallied with
the book records
3 INCOME
a. Has income on the investments been computed, if required to
be done
b. Has any income been recorded in the books of the branch
contrary to the head office instructions

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ASSETS - ADVANCES
1 Do the advances figures under each sub head in the branch
balance sheet tally with the break up thereof in the statements
2 Has the branch management provided a confirmation as to
whether all the prudential norms of RBI for the time being in
force applicable, are followed in the preparation of the
statements of advances
3 Has the system of preparation of the statements of advances
been put to check by the branch or head office and is there a
certificate/representation that all the RBI parameters have been
built into the system driven information
(If not, a qualificatory para must be brought into the Main Report)
4 Has a comparison been made of the summary of the year end
advances classification with that of the earlier year and
analysed
5 Has a statement been obtained and checked as to the status of
aggregate NPAs at the branch (opening aggregate balance,
additions during the year, upgradations during the year,
reductions due to repayments and closing balance)
6 Has the status of the branch NPAs been compared with that of
the earlier year and reviewed/analysed
7 Has it been understood that audit verification procedures require
in depth examination of the selected accounts with reference to
 Documentation (based on appraisal)
 Operations
 Security (primary and collateral and guarantees)
 Advance outstanding
8 Is it understood that the objective of verification of advances is
to ensure that
 Disclosures in the branch balance sheet are correct and in
line with the legal requirements
 Internal classification of borrowal accounts at the branch is
as per the applicable RBI regulatory norms (standard, sub
standard, doubtful, loss)
 Provisions can be computed (to the satisfaction of auditors),
based on appropriate classification and consideration of
security/guarantee etc.;
 Income recognition is made on performing accounts and not
recognized / derecognised in respect of non performing
advances
9 Have the daily exception reports been reviewed for a period of at
least three months (prior to the year end), to recognise adverse
features related to advances accounts and have the accounts
that need examination, been identified, and included for
examination

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ASSETS – ADVANCES (Contd.)

10 Has selection of advances accounts been made for verification
based on the following criteria:
a. All Large Accounts (As per the requirements of reporting in

the LFAR , large advances are those in respect of which the
outstanding amount is in excess of 5% of the aggregate
advances of the branch or Rs. 2 crore, whichever is less)
b. Adversely commented accounts in the latest reports of:

 RBI (Accounts in which there is divergence with RBI)
 Concurrent Auditors
 Inspection
 Statutory Auditors (including in LFAR)
 Latest Quarterly review
 Credit Audit Reports
 Stock audit reports
 Any other special report (Including the Manager’s handing over
charge report, on change of branch Incumbent)
c. Standard Accounts in default
 Irregularity due to non submission of stock statements for 3 months and
such irregularity persisting for 90 days thereafter
 Non review/ renewal of limits within prescribed period
 Others in default in servicing of interest/installments
 Accounts where there is frequency of devolvement of LCs/Guarantees
 Accounts restructured /rehabilitated
 Accounts in the critical list of the Bank
 Accounts frequently overdrawn and regularized towards the end of each

quarter
 Standard Accounts with Interest (Suspense/ Unapplied)
d. BIFR cases classified as Standard
e. NPAs upgraded to Standard
f. Advances involving Fraud
g. Standard/sub standard Accounts in litigation/dispute
h. Accounts where restructuring/rehabilitation is requested
i. Advances where there is substantial erosion in security value
j. Wilful defaulters
k. FITL/WCTL accounts
l. major problem accounts (including in consortium/multiple banking)
m. restructured accounts in default
n. Accounts not subject to special regulatory treatment
o. Advances taken over from other banks
p. One time settlement cases in default
q. Advances identified after the year end as NPAs
r. MSME Borrowers registered under the GST Regime as on 31.1.2018

having an exposure in aggregate (including non-fund based) up to Rs.
25 Crore.
s. Other accounts as per request as per Section A Annexure IA
(Report adverse features and change in classification in the accounts

examined)

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11 VERIFICATION OF ADVANCES PROCESSED BY CENTRALISED XX XX
PROCESSING CELL
a. Have you examined the documentation in respect of advances
accounts selected , by access to the relevant papers
(Non access to documentation needs a qualification in the
Main Report)
b. Have you examined the operations in accordance with the
authenticated terms of sanction on record in the cases tested
12 BILLS DISCOUNTED AND PURCHASED
a. Does the balance in the books tally with that as per bills
discounted and purchased (Report difference)
b. Are there any old/large bills that are outstanding at the

branch (Report)
c. Has frequent returning of bills been noticed at the branch

and whether these returned bills are replaced by fresh bills,
rather than being paid.(Report)
d. Is interest recovered on the overdue period of the bills

matured and not paid on time.
(Interest due but not recovered to be reported)
e. Are cash margins being received on bills, as per sanction

and not released till realisation of the bill (Report, if
adverse)
f. Has the branch wrongly treated as “secured”, the

following:
 Documentary bills (RR/airway bill/bill of lading) under
delivery-against payment terms which have been parted
with
 Documentary bills under delivery-against acceptance
terms, supply bills where acceptance has been obtained
and bills parted with
(Report as Unsecured)
g. Check and report bills drawn on sister concerns, associates
and unauthorised parties
h. Are there unusual matters like sequentially numbered
invoices/ transporter’s bills to the same drawee, frequent
dishonour of bills by drawees and amounts discharged by
the drawer
13 CASH CREDITS, OVERDRAFTS, DEMAND LOANS
a. Are there any adverse balances in deposits accounts that
need to be shown as advances
(report, if advances do not include these)
b. In the accounts identified and checked, are there any
adverse features as regards appraisal, documentation,
operations, security and outstanding balances that has
effect on the classification
(Report change in classification giving reasons)
c. Does the branch give a copy of the documents executed in
connection with the advance, to the customer
(Report in LFAR, cases where these have not been
sent to the customers)
d. Are there blank/unfilled /incomplete documents executed
with the customers
(Report )

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CASH CREDITS, OVERDRAFTS, DEMAND LOANS(Contd)
e. Has evidence been seen as regards the existence and
realisable value of security (primary and collateral) in the
cases examined
f. Are adverse comments noted for the purpose of the
report
g. Has the drawing power been computed in the manner
required in respect of stocks and debtors in the cases
examined
h. Has any advance account been regularised towards the
year end by adjustment /transfer entries, but for which
the advance classification would adversely change
i. Has the classification change been discussed with
management and representation obtained
j. Whether the changes in classification of the advances
accounts have been reported with reasons, through the
MOC
k. Have any accounts been identified as intrinsically or
potentially weak, but due to the RBI technical norms
have been treated as advances with ‘standard’
classification
(Report in LFAR))
14 TERM LOANS XX
XX
a. As at the year end, are there any term loans, (classified by the
bank as “standard”) where the amount of instalments of
principal and/or interest remain overdue
 For a period of more than 90 days (other than crop loans)
 For two crop seasons (short duration crops)
 For one crop season (short duration crops)
(Report, giving details)
b. Have any term loans earlier classified as NPA, been upgraded
without any justification (Report)
c. Has any default been observed in the servicing of loans
comprising FITL/WCTL (Report)
d. Housing loans to staff
Are there any defaults in repayments (Report)
Are there any advances to persons who have ceased to be
employees (Report)
15. INCOME RECOGNITION
a. Wherever change in classification is made, has it been
ensured that income earlier accrued but not realised is
reversed
(Report if income is wrongly recognized on NPAs)
b. Has it been ensured that where due to audit verification,
classification of the advance is changed adversely, the
balance in the borrowal account at the branch is net of
interest reversal, to the extent it is not realised
c. Has the branch computed upto the year end, the income
contractually due on NPAs but not recognised (interest
suspense/unapplied interest) – If not, take observation for
reporting in LFAR
d. Check whether, in the absence of instructions of the
borrower, the order of appropriation of receipts from the
borrower is towards principal or interest
(Report, if system is inappropriate)

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16.
RESTRUCTURING IN ACCOUNTS
a. Has a list of advances involving restructuring been
received
b. Has it been checked that only eligible accounts are
restructured
(Report ineligible cases and the effect thereof)
c. Have reasons / justification been ascertained for
advances subject to restructuring, being in ‘standard ‘
classification
d. Are there any cases of multiple /repeated restructuring
where advances are treated as ‘standard’ (Report such
cases)
e. Are there any advances subjected to refinance, of
change in ownership, where the RBI norms have not
been complied with
(Report such cases and effect on classification /
provisioning)
f. Are there any restructured accounts where moratorium
for payment of interest has been granted and interest is
accrued
(Report such interest wrongly recorded)
g. Has diminution in value / sacrifice been properly
computed in cases of restructuring that are pending at
the year end
(Report such cases and the amounts involved)
h. Has the FITL component of the restructured accounts
been retained in a separate account - "Sundry Liabilities
Account (Interest Capitalization)".
i. Are there any advances accounts for which benefit of
better classification has been given, contrary to RBI
norms
(Report such cases with effect on classification /
provisioning)
17 Additional Procedures(If any)

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ASSETS - FIXED ASSETS:

(in case assets are recorded at the branch)
1 PREMISES:
a. Has the cost of premises been segregated
 Buildings/superstructures on leasehold land
 Superstructure on leasehold land
 Freehold land
 Buildings/superstructures on freehold land
b. Are there any additions during the year to
 Superstructures on leasehold land
 Freehold land
c. Are there any deductions during the year
 Superstructures on leasehold land
 Freehold land
d. Additions/further capitalisation
 Vouch new acquisitions with reference to sale
deed/allotment letters/documents of title
 Check additions/ extensions to existing buildings with
reference to costs incurred as per contracts/agreements
and book entries
 Check that all costs incurred and liabilities till year end are
capitalized
 Capital work in progress – are all progress bills as per
contracts, duly recorded
e. Has profit/loss on sale/disposal of premises, if any,
been vouched
f. DEPRECIATION/AMORTISATION
 Has leasehold land been amortised as per the lease terms

 Are superstructures on lease hold land being depreciated
over the period not exceeding the period of the lease of the
land appurtenant thereto
 Is depreciation in accordance with the laid down
accounting policy and as per the Accounting Standard (AS)
10
g. Do the audit notes /observations cover the following
 Figures in the statements being at variance with those as

per books
 Evidence/documents of title not available in respect of the
ownership of the premises and disputed title to /litigation
on properties
 Adjustments pending in respect of additions/deductions/
capital work in progress
 Short/excess depreciation / amortisation during and till the
year end
 Premises, if not insured or under insured
 Municipal/taxes/levies unadjusted or in dispute

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2 ASSETS-OTHER FIXED ASSETS (including furniture and

Fixtures- in case the value is recorded at the branch):
a. Are figures checked under each sub head in respect and
adverse observations noted in respect of
 Opening cost
 Additions (including internal transfers)
 Assets acquired for which liabilities have not been adjusted

till the year end
 Entries in suspense accounts represented by fixed assets
 Deductions (including internal transfers)

 Closing balance of cost
 Branch renovation and other repairs expenditure –whether
segregated between capital and revenue
 In case of additions to/deductions from assets that were
vouched, is there any authorisation by the delegated authority
b. DEPRECIATION
 Opening depreciation
 Depreciation adjustments during the year as per the
accounting policy, based on actual date(s) of acquisition
/deduction (period of use)
 Aggregate depreciation till the year end
 Profit /loss on sale/disposal/discarding of assets
 Assets remaining uninsured
c. Evidence of Existence f Assets
 Is there a system of taking periodic physical inventory of the

fixed assets and reconciliation thereof with the book records
 Has the system been followed
 Have the discrepancies been adjusted
 Are there any major discrepancies that need reporting
d. Other Procedures (If any)

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ASSETS - OTHER ASSETS

1 Inter-Office Adjustments (net)
a. Has the system of inter branch matching/reconciliation been

understood
b. Have you come across any originating debits(that were not
authorised by head office ), in Head Office Account
maintained at the branch
c. Are there any unattended inward communications from head
office/reconciliation cell that remain responding; and based
on the nature thereof, do these warrant any adjustment
entries through MOC.
d. Does the system warrant the preparation and submission of
daily head office summaries , and if so, has this discipline
been followed
e. Have the entries originated at other branches prior to, but
responded after the year end, been reported through the MOC
f. Are there any old /unadjusted debits in head office/sub heads
accounts that remain unexplained and whether these have
been reported through the MOC
2. ADDITIONAL PROCEDURES (if any)

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3. INTEREST ACCRUED (Comprises that not due)

Report Interest accrued and due at the year end, if included
under the above sub head, in respect of:
a. advances accounts in cash credit, overdraft and bills,
contrary to RBI norms particularly where the bank
debits the borrowers’ accounts with interest at each
month end.
b. Investments, if any at the branch
c. Other interest bearing accounts
4. STATIONERY AND STAMPS
a. Has physical verification as at the year end revealed any
discrepancies in items of critical/security paper stationery as
compared to book records
(Report discrepancies, if noticed)
b. Whether the branch follows the laid down system of internal
control over the receipt, custody, issue and stock of
stationery comprising security paper stationery
(Report inadequacies/breach)
c. Other than security paper stationery
 Does the branch hold bulk stationery

 Has such stationery been physically verified and tallied
with book records
 Are there any material differences that need reporting
a. Does the stock of stamps physically verified at the year
end tally with that as per books

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5. Others – suspense /sundries(or other similar heads of

account):
a. Has the list/year wise analysis of outstandings in such
accounts been obtained
b. Are there any unusual/old/large balances that require
reporting for provisioning
c. Staff Advances (Non Interest bearing)
Are there any old/unusual amounts outstanding in on such
advances, or any adverse features
6. Other Procedures (If any)

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OFF BALANCE SHEET ITEMS - CONTINGENT LIABILITIES XX XX
1. Claims against the bank not acknowledged as debts

a. Has a list of updated claims lodged against the
bank been obtained and status thereof checked , including
based on correspondence /communications and
whether the claims have been contested/not
acknowledged
b. Has a scrutiny been made of details of major law charges
to determine whether any expenditure has nexus to any
claims/ disputes/litigation matters having financial
implications involving possible liability not acknowledged.
c. Whether any claims outstanding as at the previous year-
end have been omitted / ignored unless liability in respect
thereof has ceased.
Report difference in the Main Report.
d. Has information on claims recorded in the post-balance
sheet period been sought to ensure that no items relating
to the year under audit have been ignored.
2 Liability for partly paid investments: (if applicable) -
Report any liability required to be, but not adjusted
3. Liability on account of outstanding forward exchange

contracts: (if applicable)
a. Whether register(s) relating to the outstanding
forward exchange contracts have been checked to
ensure that all transactions contracted upto the year-
end have been correctly recorded.
b. Has the basis of year-end foreign currency conversion
been checked with reference to Head Office/controlling
authority communications
c. Whether the Branch has recorded the net profit/loss upto
the year-end as per R.B.I./FEDAI instructions for the time
being in force.
4. Guarantees given on behalf of constituents:
a. Does a scrutiny of the guarantee register(s) ensure that
the internal control system for issuance of guarantee
documents, is observed and particularly that these are
issued sequentially and are expeditiously recorded
b. Has the list of outstanding guarantees been checked with
the relevant registers to ascertain whether all outstanding
amounts are included as at the year-end
c. Do guarantees include any that have been invoked and
paid
d. Where guarantees are invoked and paid, has the Branch
taken action to recover the amounts and invoked counter
guarantees
e. Are there any expired guarantees, where the claim period
has expired and the obligations have ceased, but these
continue to be disclosed
f. Are there any continuing guarantees where cash margins
received have been reduced
g. Whether secured/unsecured obligations correctly shown
h. Whether year end rates applied for FOREX guarantees

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5. Acceptances, endorsements and other obligations:
6. a) Letters of credit:
 Have the balances in the outstanding Letters of credit
been checked with reference to the relevant L.C.
Registers maintained
 Whether margins / security is obtained and held as per
the terms and conditions in the cases examined.
(keep record of cases tested in the work papers and report
any adverse observations)
b) Bills accepted:
 Check whether recoveries are being made from
customers upon the maturity of the bills accepted by
the Bank
 Are there any old balances that are not warranted,
considering the nature of the bills
7. Bills rediscounted:
 Has it been checked whether contingent liability is shown
only on account of outstanding bills rediscounted and
action was taken as at the year end to reverse the
obligation that ceased.
 Have confirmation certificates from the parties
rediscounting the bills (R.B.I./ I.D.B.I./D.F.H.I. and other
institutions/banks), been obtained and checked in
evidence of the outstandings
8. Letters of Undertaking
 Obtain confirmation that all LOUs issued are duly
recorded upto the year end.
 Verify year-end outstanding obligations in foreign/
domestic currency
 Check inter bank confirmations for outstandings
 Check whether there are any unpaid claims from
overseas banks that are in default (Report these)
9. General:
Has a Management representation been obtained to the
effect that all known liabilities have been duly
incorporated upto the year-end and that there are no
contingent or other liabilities except to the extent disclosed
in the branch returns submitted for audit.

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10. BILLS FOR COLLECTION

a. Has a scrutiny been made of the age-wise details of the
pending bills, to ascertain reasons for retaining bills:
 beyond the normal dates of retention; or
 contrary to instructions of the constituents; or
 those which have been frequently returned, and for
which the customers have not been charged.
b. Are there bills drawn on sister branches that need to be
deleted
11. Additional Procedures (if any)

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INCOME - INTEREST EARNED xx xx
1 Interest/discount on Advances/Bills:
a) Large Advances:
(with balances above 5% of the aggregate branch
advances as at the year-end):
i. Has interest application been checked for the

st
quarter ended 31 March, based on interest rates in
force
ii. Is interest being charged at monthly intervals on all
cash credit and overdraft accounts
iii. Has the effective date been observed in the
computer software programme for any changes in
the rates applicable
iv. Are the rates of interest based on the pricing as per
Credit rating of the borrower (If not, report effect of
the non compliance in the accounts examined)
v. Has interest been charged upto the year end, or has
it been applied to the borrowal accounts on a date
prior to the year end. If so, how much is the short
interest recorded till the year end.
(Accounts examined must be listed in the audit notes
and adverse features reported)
b) Are there any large debits in the Interest Income account
that have not been explained
(Enquire in writing the justification for such debits)
c) Does the system warrant in case of accounts identified as
NPAs during the year , that Interest applied but not realized
is reversed to the account of the borrower, rather to a
separate Interest Suspense Account
(Report the amount of such reversal)
d) Are there any discrepancies reported by Internal/concurrent
auditors/Inspections, that pertain to the year, but not
adjusted
(Report)
e) Has any interest been accrued on NPAs and on amounts
determined/reclassified in audit as NPAs
(Report such interest as wrongly recorded)
f) Are there any communications from borrowers pointing out
differences in Interest charge, and whether action as
justified has been taken in this regard (Report adjustments
required)
g) Are there any large deposits towards the year end in
borrowal accounts towards interest, particularly in cash and
cash withdrawn by the just after the close of the year. If so,
have these been examined
h) whether any adjustments, by manual intervention/editing
have been made as at the year end towards interest and
have these been checked and justified
i) Where moratorium has been allowed in cases of
restructuring of loans, whether interest has been accrued
and justified in standard accounts, contrary to RBI norms
(Report)
k) Is Interest upto December 2017 pending as at the year end
(Report advance as NPA, if not done by Branch)

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l) Other Advances:
i) Term Loans:
Has interest been checked for the quarter ended 31-3-
.2018 in
- 5 of the largest accounts
- 2 accounts at random
[List out names of the Accounts checked]
ii) Cash credits, overdrafts, demand loans etc.

Has interest charged in each category of advances
covered by the above sub–head, been checked for one
month (December 2017)
- 2 accounts (largest advances, other than as per (i)
above)
- 3 accounts at random
Report whether interest has been short/excess charged
from borrowers based on application of wrong credit
rating- List such Accounts
iii) Are there any accounts where interest upto December
2017 is in arrears as at the year end (Report borrower as
NPA, if not done by Branch)
(Prepare a list of accounts and periods for which
interest has been checked - as per the
recommended proforma for Report –Section D I.4)
m) Are there any term loans, where installments of principal
are in arrears for 90 days as at the year end , and whether
interest has been accrued thereon (Report)
n) Does the system warrant the computation of Interest
receivable on Term Loans coinciding with each calendar
quarter , or is it based on contractual obligations for each
term loan on stipulated due dates (Report system /
discrepancies)
o) Is interest computed and shown as accrued and due on
Bills that are overdue as at the year end. (Report)
p) Have year end entries been checked for Discount reversal
in Bills Rediscounted with other Banks/Institutions (Report
errors)
q) Are there any discrepancies reported by Internal/concurrent
auditors/Inspections, that pertain to the year, but not
adjusted (Report)
r) Are there any communications from borrowers pointing out
differences in Interest charge, and whether action as
justified has been taken in this regard (Report adjustments
required)
s) Check whether, in the accounts examined interest has
been recorded as income on Non-Performing Accounts
contrary to RBI norms

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INTEREST EARNED: (Contd.)

2 Income on Investments:
Has authority/basis for recording income on investments, in
the branch returns, been checked; and if authorized, vouch the
same in-depth.
3 Interest on balances with Reserve Bank of India and other
inter-bank funds:
Has authority/basis for recording income on balances with RBI

and other inter bank funds, been checked in the branch
returns, and if authorised, vouch the same in-depth.
4 Others:
i. Are there any items under the head “Other Assets” in the
Balance Sheet that are interest bearing. Have the interest
adjustments at the year end been checked
ii. Has the basis of interest receivable on security deposits
been determined and has the year end adjustment been
checked
iii. Has the adjustment of interest due from HO been checked
with reference to the HO Advice.
(Record must be kept for items tested)
5 Other Procedures : (if any)

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INCOME - OTHER INCOME:

1 Commission, exchange and brokerage:
a) has Test check been made for commission on:
- Bills for collection - for bills in hand as at the year-end
- Letters of credit (those current - 10% of the largest ones
in value)
- Guarantees (those current - 10% of the largest ones in
value)
b) Have entries each in excess of 2% of the aggregate, been
vouched, in each income head in which commission,
exchange and brokerage, is recorded.
c) Have reasons for major discrepancies between locker rent
collected and that normally due on the basis of lockers let
out, been ascertained
d) Whether adjustments to the extent required, have
been made in the accounts in compliance of the
latest reports of:
- the Branch inspection audit,
- Income/Revenue audit,
- concurrent audit, and
- any special audit.
2 Profit on sale of investments (less Loss):
(If applicable at the branch)
Check authority/basis for recording in the Branch returns,
the profit/loss on sale of investments- and vouch the
transactions in depth.
3 Profit on sale of land, buildings and other assets (less

Loss (If applicable at the Branch)
Check authority for disposal of:
a. fixed assets, if any, sold during the year under audit;
and
b. non - banking assets acquired in satisfaction of
claims.
c. Vouch transactions in evidence of profit/loss recorded
by the Branch in respect of assets, as aforesaid.
d. Report if any assets have been revalued and entries
recorded in respect thereof at the Branch level.
4. Profit on exchange transactions (less, Loss):
a) Check that the year-end outstanding entries are

converted at appropriate rates of exchange as
communicated by the Controlling authority, for
recording profit/loss on exchange transactions.
b) Test large transactions (each in excess of 2% of the

aggregate in the ledger), and check whether these
are recorded in compliance with the directions of the
controlling authority.
c) Scrutinize the transactions recorded in the post-Balance

sheet period to ensure that no material items have been
ignored upto the year-end.
d) Enquire into unusually large entries involving huge

gains/losses for the year (and whether these pertain to
the Branch or another linked office).

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INCOME - OTHER INCOME:

5. Miscellaneous Income:
a) Ascertain whether any premises or part thereof is let

out, and if so, whether rent recoveries are recorded
upto the year-end at the rates as applicable.
b) Check items, each in excess of 5% of the aggregate
amount in the income sub-heads relating to
'Miscellaneous income'.
(Take note of work done, in the audit file)

6. OTHER PROCEDURES (If any)

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INTEREST EXPENDED:
1 Interest on deposits:
Has interest expended been test checked for each category
of deposits, as under and note kept on record
(based on the system and modifications in applicable
rates as made from the effective dates):
(Have ‘exception’ reports been generated on adverse
features and remedied)
2 Are there any large/unusual credits in Interest Expenditure
during the year as per Exception Reports, that remained
unattended to (Report)
3 Does the system warrant computation of Interest on
Unclaimed/Unpaid Deposits
If not, report
4 Are there unclaimed deposits in Current or Deposit Accounts
of deceased depositors on which interest has not been
computed
Report
5 Are there any Current Accounts of RRBs on which interest is
exigible
6 Are there any adjustments pending in respect of Interest
discrepancies pointed out by the Internal/Concurrent/Revenue
auditors (Report)
7 Term Loans
Check interest on year-end Term Loans from Banks
/institutions (100%).
Has the system been reviewed to see if there is scope for
interest accretion again on deposits in which quarterly
/monthly/interim interest is paid/applied
Has tax deduction at source been made and duly deposited
with Govt. in compliance with the Income tax Act and the
Rules made thereunder
Is there any amount of TDS paid that is not linked to any
Depositor, and which requires provision
Are there any adjustments pending in respect of Interest
auditors (Report)
Has a comparative analysis been made Interest on Deposits
and divergence noticed as compared to the earlier year
Has a test check been made of interest computation on
FCNR(B) Deposits to see if it is line with RBI Directives

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INTEREST EXPENDED
8 Savings Bank Deposits:
Has any divergence been seen in the interest expenditure for
the year vis a vis deposits, as compared to the earlier year;
and if so has this been satisfactorily enquired into
Has provision been made for interest liability for the period
after the last application of interest in the individual accounts,
where such application date does not coincide with the year
end.
Has a test check of accounts revealed any discrepancies
(check 5 accounts at random and take note of accounts
checked)
Are there any adjustments pending in respect of Interest
auditors (Report)
9 Interest on R.B.I./inter-bank borrowings
(If applicable):
Has the authority / basis on which the branch has recorded
interest on the above, been checked.
10 Others:
Check interest / discount (100%) on borrowing/refinance
from financial institutions (if borrowings are authorised by
Head Office).
Check interest on non-risk bearing participation certificates
(100%). (if participation is authorised by H.O.)
11 OTHER PROCEDURES (If any)

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OPERATING EXPENSES:
1 Payments to and Provisions for employees:
a. Has a review been made of:
 salaries/allowances for one month (Month_______)
 major variances in such salaries, allowances in any
other month; and have reasons for the same been
satisfactorily explained
b. Whether pursuant to any award/settlement or otherwise
any arrears of remuneration are due but not adjusted.
c. Whether HO has authorised any debits and the related
advices have been checked
2 Rent, taxes and Lighting:

a) Check rent for 1 month and verify whether adjustments
have been made for the full year on account of rent at
the rates as applicable and as per agreement in force.
b) If any agreement has expired, check provision for
accelerated demand/claim; and report non
provision/adjustment
c) Report whether Rent includes House Rent Allowance
to employees.
d) Report municipal rates/taxes not paid/adjusted in
respect of the Branch, for the year under audit
e) Report any disputed liability on this account upto the
year-end, not provided/considered as Contingent
3 Printing and Stationery:

Check items, each in excess of 5% of the total expenditure
recorded at the branch.
Check and report if any articles of stationery have been shown
in the Branch statements (Report the same)
4 Advertisement and Publicity:
5 Depreciation on Bank's Property:

a) Check H.O. instructions as regards adjustment of
depreciation on the fixed assets of the Branch.
b) Check whether depreciation on fixed assets, has been
adjusted at the rates/basis and in the manner required by
Head Office.
c) Report unadjusted depreciation on assets acquired but
not capitalized.
6 Law Charges:
Review items, each in excess of 10% of the total expenditure
7 Postage, Telegrams, Telephones etc.

a. Check items, each in excess of 10% of the total expenditure
b. Check whether OYT deposits have been written off in
accordance with the system in force.
8 Repairs and Maintenance

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1 General Ledger:
Have the closing balances in the statements been checked
as in agreement with the books
Are there any unusual entries in the day end /month end
procedures while closing the books at the year end (that
require reporting).
2. Safe Custody:
Has it been ascertained as to whether:
 securities/parcels/packages of the customers kept in safe
custody with the branch are intact and as per entries
made in the Safe Custody Register maintained.
 seals are intact in respect of sealed covers of
customers (The contents of such covers are not
required to be verified by opening the seals).
 the system warrants safe custody items being returned with
proper acknowledgements from the recipients.
 income on account of safe custody charges.
(Note must be kept in the audit file for work
executed)
3 Frauds/Vigilance Cases:
a. Scrutinise the list of cases recorded at the Branch

including those reported/recorded after the year-end for
considering in the long form audit report, any major
items.
 For frauds
 For Vigilance cases
 Customers’ complaints for unauthorized debits to
their accounts pending enquiry (not covered by the
above)
b. Ascertain whether adequate provision has been made /
recommended for debits arising at the branch on
account of frauds reported/recorded.
5 Corresponding Comparative Figures:
a) Enquire from the Branch Management the reasons for

disproportionate unusual/large variations under income
or expenditure heads as compared to the corresponding
financial figures of the earlier year.
b) Broadly review the trends between:
- the interest earned in relation to advances and
outlay of funds; and
- expenditure by way of interest vis-a-vis the Deposits and
other liabilities,
- current and preceding year’s aggregate of
. Interest Suspense
. Unapplied Interest
and ascertain from the management, reasons for
divergent trends.
Report results of enquiry/ review, if not satisfactorily
explained.
(These matters are more relevant to the long form audit
report).

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NOTES AND INSTRUCTIONS - DEPOSITS:
1. Legal requirements of disclosure:

A. I. Demand Deposits:
i) From Banks
ii) From Others
II. Savings Bank Deposits
III. Term Deposits:
i) From Banks
ii) From Others
B. i) Deposits of branches in India
ii) Deposits of branches outside India
2. Demand Deposits:
Demand deposits are of the nature of current accounts at credit of parties, are repayable on demand and
include Overdue/matured Deposits, Credit balances in overdraft accounts, Deposits payable at call,
Inoperative current accounts, Vostro Accounts, *Merchant Bankers’ and similar Deposits, Interest accrued
and due on deposits and exclude Margins by way of book adjustments, if any, against bills purchased and
discounted. These are disclosed at gross figures without netting out Overdrawn/adverse balances in deposits.
Such deposits to be separately disclosed in respect of: a)Banks; and b)Others.
a) From Banks- The term "bank(s)" include banking companies, nationalised banks, S.B.I., associate banks
and other institutions, including cooperatives carrying on the business of banking, whether or not
incorporated or operating in India. These include credit balances in VOSTRO accounts . NOSTRO
accounts are expected to be invariably at debit.
b) From others - would comprise all demand deposits other than in (a) above
credit balances in overdraft accounts,
deposits payable at call,
overdue deposits,
inoperative and Dormant current accounts,
matured time deposits/cash certificates/certificates of deposits etc.
(*The reconciliation status of Merchant Banking deposits must be enquired into and reported as
this is a risk prone area)
c) Overdue/matured deposits, not subject to renewal instructions, are to be treated as deposits repayable on
demand and included in the balance sheet as Demand Deposits.
The Bank’s policy for suo moto renewal of deposits and for payment of interest on non renewal period (for the
period between maturity and renewal) of the deposits must be reviewed; and control systems examined and
reported upon, particularly in the EDP environment, where entries are automatically generated on due dates,
without the mandatory issuance of the Deposit Receipt.
Term Deposits are normally expected to be renewed within 14 days of their maturity to take advantage of
retrospective renewal/continuity of the deposit.

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NOTES AND INSTRUCTIONS-DEPOSITS(Contd.):
d) Certificates of Deposits (CDs)
Refer RBI Master Circular (FMRD.DIRD. 03 /14.01.003/2015-16 dated 1-7-2015) in respect of CDs, which,
though considered as a negotiable money market instrument, for issue in dematerialized form or Usance
Promissory Note for a specified short term resource time period (7 days to 1 year for banks, without any lock-in
period for the holders), are to be shown as Deposits as “CDs Issued”, although these have all the
characteristics of a 'borrowing'. These are issued at designated branches at a discount on the face value
(based on negotiated interest rates – fixed or floating), and repayable only at the end of a specified period, i.e.
on maturity. Being negotiable instruments, these attract stamp duty.
CDs can be issued in Demat or in physical form, and in the latter case must be issued on security paper
stationery, in denominations of Rs. 1.00 lac (FOR A SINGLE SUBSCRIBER) or in multiples of Rs.1.00 lac; and
without the benefits of repatriation, if issued to NRIs and not for endorsement to another NRI. Other than for
NRIs these are transferable by endorsement and delivery.
Pre-mature buyback is not permitted and no loans can be taken against CDs except those held by mutual
funds keeping in view provisions of paragraph 44(2) of the SEBI (Mutual Funds) Regulations, 1996; and unless
the RBI relaxes these restrictions for temporary periods.
Upon maturity, the relevant amounts become repayable on demand and are expected (as per RBI instructions)
to be treated as demand deposits.
For audit purposes, the aggregate amount of such CDs issued can be verified also from the data furnished on
the web-based module under the Online Returns Filing System (ORFS). Pro-rated expenditure by way of
discount up to the year- end on each certificate must be accrued / adjusted and included under the head "Other
Liabilities", as the terms of issue warrant that the proceeds be paid only on maturity.
3. Savings Bank Deposits :
a) Savings deposit is a form of demand deposit (by whatever name called), which is subject to the restrictions
as to the number and amounts of withdrawals permitted by the bank during a specified period. The above sub-
balances held in inoperative savings bank accounts.
b) Interest accrued upto the year-end on savings bank accounts which accrues and is due (though not applied
) to the account holders, should be grouped with, and form part of, the amount disclosed against the above
sub-head. Though Banks now have the liberty to apply interest even at less than at quarterly rests, most
banks apply interest and credit the individual Savings Bank Accounts twice a year with a cut-off date prior to
the year-end. Provision for the balance period upto the year-end may made at branches/Head Office,
depending on the practice adopted by each bank. Thus, if interest is actually applied/credited to account
holders upto January, then for February and March, the provision whether made at the branches/Head
office, should form part of the amount disclosed against the sub-head "Savings Bank Deposits".
Interest on savings bank accounts is required to be calculated on a daily product basis in terms of Para
3.2.1 of the RBI Master Circular DBR.No.Dir.BC. 7/13.03.00/2015-16 dated 1-7-2015; and the banks have
been given freedom to fix the rate of interest on savings accounts.
c) Savings Accounts cannot be opened for Government departments/bodies* etc. as per clause 6(m)(i) of
the said RBI Master Circular, such prohibition not being applicable to organizations/ agencies as per
Annexure 2 of the Circular (*Primary Co-operative Credit Society being financed by the bank, Khadi and
Village Industries Boards, Agricultural Produce Market Committees, Societies registered under the Societies
Registration Act, 1860 or any other corresponding law in force in a State or a Union Territory except societies
registered under the State Co-operative Societies Acts and specific state enactment creating Land Mortgage
Banks, Companies governed by the Companies Act, 2013 which have been licensed by the Central
Government under Section 8 of the said Act, or under the corresponding provision in the Indian Companies
Act, Institutions other than those mentioned in clause 6(m)(i)and whose entire income is exempt from
payment of tax under the Income-Tax Act, 1961, Government departments / bodies / agencies in respect of
grants/ subsidies released for implementation of various programmes / Schemes sponsored by Central
Government / State Governments subject to authorization , Development of Women and Children in Rural
Areas (DWCRA), Self-help Groups (SHGs), promoting savings habits among their members, Farmers’ Clubs
– Vikas Volunteer Vahini – VVV)
4. Term Deposits:
a) Term Deposit means a deposit for a fixed period and which is withdrawable only after the expiry of such fixed
period, and includes recurring/cumulative/reinvestment deposits/ cash certificates; and exclude Interest
accrued and not due, which must be included in “Other Liabilities and Provisions – Interest Accrued” in
Schedule 5 annexed to the Balance Sheet. Deposits repayable after a *specified term are required to be
disclosed under the above sub-head separately for banks (which term is defined -refer Para 2(a) above), and
Others.
(*Duration of "specified term" has not been stipulated, but cannot be less than 7 days)

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b) Term Deposits from banks should normally be in round figures and reasons for the amounts being in odd
figures (unless renewed with interest due), must be enquired into.
In describing 'Money at call and short notice' as an asset, R.B.I. has used both the terms "deposit" and
"lent", which have relevance to the heads, Deposits/Borrowings. Such moneys being repayable after a
"specified term", would have to be included as 'Term Deposits'.
c) Banks have started renewing overdue term deposits suo moto with formal instructions being obtained at the
time of receipt /renewal of deposits. On maturity dates, the book entries are automatically reversed in the
ledgers (in the EDP environment); and it needs to be ensured that receipts are issued in physical form
(Refer Para 3.21 of the said Master Circular), except in case of accounts frozen by authorities (refer
Para 3.7). Inadequate/loss of control over credits comprising “Deposits” , is a risk/fraud prone area and risks
relating to receipts not issued and those issued but held in its own custody by the branch, needs to be
reported in the LFAR (See Section K).
Interest accrued and due should form part of the Term Deposits.
Interest normally credited to various categories of deposits issued under special schemes, recurring
deposits where interest is on compounded basis and is considered by banks as due, would be included in
Term Deposits.
Interest accrued but not due (comprising provision made/estimated on Deposits for broken periods), are not
to be treated as part of “Deposits” but as “Other Liabilities”
Particular care needs to be taken for FCNR(B) and other deposits in foreign currency, where interest
accrues but is not due till normal maturity of each deposit; thus requiring the provision of interest
accrued ,to be treated as part of “Other Liabilities”.
5. Deposits under the Gold Monetisation Scheme, and interest accrued need to be checked in terms of the
RBI Directive (refer Section Q)
Designated Banks can record in their books only Short Term Bank Deposits (STBD 1-3 years with a roll over in
multiple of one year) equivalent of the gold value accepted as per the Scheme/Directions. Medium and Long
term Govt. Deposits are accepted on behalf of the Govt. and while these are not recorded in the accounts of
the Bank, a memoranda record should be kept due to accountability issues.
6. Balances held in Foreign Currencies:
Deposits under the Scheme mean “term deposits” received by the banks in the designated foreign
currencies, including from NRE accounts (in Pound Sterling, US, Canadian and Australian Dollar, EURO and
Japanese Yen), for a fixed period and withdrawable only after the expiry of the said fixed period; and include
Reinvestment Deposits and Cash Certificates or other deposits of similar nature, but not Recurring deposits.
“FCNR(B) account” means a Foreign Currency Non-Resident (Bank) account referred to in Foreign Exchange
Management (Deposit) Regulations, 2000, as amended from time to time.
As per the directives in the RBI Master Circular (DBR.No.Dir.BC.8/13.03.00/2015-16 dated 1-7-2015), FCNR
(B) deposits, can be received only from Non Resident Indians (individually or jointly, and not from Overseas
Corporate bodies) for periods of 1year and above and up to 2 years, 2-3, 3-4, 4-5 and 5 years only,
including by transfer from NRE Account(s); and interest on the deposits accepted should be calculated on the
basis of 360 days to a year, in the manner stated hereunder (also refer Section O):
a) For deposits up to one year, at the applicable rate without any compounding effect,
b) In respect of deposits for more than 1 year, The interest on FCNR (B) deposits should be calculated at
intervals of 180 days each and thereafter for remaining actual number of days, till normal maturity.
However, the depositor will have the option to receive the interest on maturity with compounding effect.
Interest rates to be adopted by Management shall be within the limits prescribed by RBI, with penalty for
premature encashment/conversion, except in case of death of the depositor.
In terms of Foreign Exchange Management (Crystallization of Inoperative Foreign Currency Deposits)
Regulations, 2014 and vide Notification No. FEMA 10A/2014-RB dated March 21, 2014 , issued under Foreign
Exchange Management Act (FEMA), 1999 relating to inoperative foreign currency deposits, directions have
been issued under Sections 10(4) and 11(1) of FEMA; and as per Clause 2.7 of the RBI Master Circular
DBOD.No.Dir.BC.14/13.03.00/2014-15 dated 1-7-2014, inoperative deposits having a fixed term and
those with no fixed term maturity, after the expiry of a three month notice upon completion of three
years , will get crystallized into Rupees.

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7. Interest payment in special cases: No interest can normally be paid on Current Account or certain other type
of balances. It can, however, be paid:
a) On Current Accounts:
- to Regional Rural Banks sponsored by the Bank - at the rates as mutually agreed, though banks are
encouraged not to pay interest to RRBs on balances maintained with the Bank (Para 3.10 of the said
Master Circular )
- to claimants/legal heirs/nominees in case of deceased depositors, sole proprietorship concerns as per
Para 3.18 of the Master Circular - interest to be paid only with effect from 1-5-1983, or from the date of
the death whichever is later : at the rate applicable to Savings Bank Accounts on the date of payment;
(in case of NRE Deposit where the claimants are resident, the deposit on maturity is to be treated as a
domestic deposit, interest is to be paid for the subsequent period at a rate applicable to domestic deposit
of a similar maturity; and
b) On Term Deposits (other than FCNR(B)- where the depositor dies:
Bank is required to lay down a transparent policy as per Para 3.18 of the Master Circular referred to above.
c) If a Fixed Deposit Receipt matures and proceeds are unpaid, the amount left unclaimed with the bank will
attract savings bank rate of interest (Para 3.4 of Master Circular for Re. deposits).
8. Inoperative Accounts:
a) A response to the letter addressed to the Branch will assist the Auditor to take a view on the system of
dealing with Inoperative Accounts. Attention needs to be sharply focussed on debits/withdrawals
to ascertain whether these are unauthorised. In testing the debits, attention should be specially paid to
large and repetitive debits out of otherwise dormant accounts.
Centralisation of these needs to be encouraged and such a recommendation needs to be made through the
LFAR.
b) While scrutinising deposit ledgers, it is appropriate to ensure whether there are any stagnant/ inoperative
accounts which remain to be transferred. Computer generated exception reports will also reveal the status of
the Inoperative accounts.
c) Internal controls over Inoperative accounts, is imperative. The identification and transfer to separate ledger
sheets and withdrawal of “specimen signature” cards from active cards are important controls.
[Reference may also be made to the RBI Master Circulars dated 1.7.2015 -
DBR.No.Dir.BC.7/13.03.00/2015-16 and DBR.No.Dir.BC.8/13.03.00/2015-16 relating respectively to
domestic Deposits and FCNR (B) deposits. which have not been repealed]

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NOTES AND INSTRUCTIONS - BORROWINGS

I. BORROWINGS IN INDIA
i) Reserve Bank of India
ii) Other Banks
iii) Other institutions and agencies
II. BORROWINGS OUTSIDE INDIA
III. Secured borrowings included in I & II above
2. Normally borrowings take place in a few designated branches under due authority of the Head Office / controlling
authority; and is in the shape of:
a) Refinance (against advances etc.) including by way of participation certificates on non-risk sharing basis; and
b) Borrowings.
3. Participation certificates on risk-sharing basis comprise amounts received (generally against “standard”
advances), but in case of loan losses/bad debts the participating bank would have to suffer the risk
of loss, based on the arrangements/agreement between the banks. The recipient branch advances
should, therefore, be netted out to the extent of such participation.
4. Where borrowings are shown by the Branch, the auditor must ensure that the borrowings/refinance:
a) is separately disclosed as required by law;
b) balance confirmation certificates are obtained in evidence of borrowings from each lender; and
c) the nature and extent of security is determined and disclosed
5. Amounts received by way of Bills of exchange rediscounted are not borrowings, and the amount would be
reduced from the head "Advances-Bills Purchased and Discounted” and contingent liability disclosed to the
extent of rediscount obtained.
The relevant documentation / correspondence/confirmation will establish as to whether the amounts
are in the nature of refinance/rediscount. The present practice in banks is not to physically part with the Bills
purchased and discounted and only a confirmation that these are held (as trustee) is given to the
Bank/institution rediscounting the Bills. Money received by way of re-discount of bills are to be netted from
Advances and disclosed as `Contingent Liability' and the amounts received not treated as Borrowings.
6. Certificates of Deposits are to be treated (at the discounted value at the year-end), as Deposits and not as
Borrowings.
7. Credit balances, if arising, in NOSTRO represent Deposits repayable on demand as also VOSTRO
Accounts which are akin to Current account balances and do not constitute borrowings unless an
overdraft/borrowing facility is obtained and evidenced on record.
8. As per RBI Circular No. DBOD.BP.BC No.81/ 21.01.002/2009-10 dated 30-3-2010 relating to
Classification in the Balance Sheet - Capital Instruments, RBI has advised that the following classification
may be adopted in the balance sheet from the financial year ending March 31, 2010 :
Under Schedule 1-Capital
(1) Perpetual Non-Cumulative Preference Share (PNCPS)
Under Schedule 4 – Borrowings
(2) Innovative Perpetual Debt Instruments (IPDI)
(3) Hybrid debt capital instruments issued as bonds/debentures
(4) Perpetual Cumulative Preference Shares (PCPS)
(5) Redeemable Non-Cumulative Preference Shares (RNCPS)
(6) Redeemable Cumulative Preference Shares (RCPS)
(7) Subordinated Debt

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NOTES AND INSTRUCTIONS – OTHER LIABILITIES AND PROVISIONS:
I. Bills Payable
II. Inter-office adjustments (Net)
III. Interest accrued
IV. Others (including Provisions)
2. Bills Payable:
a) Bills payable as at the year-end would comprise of undischarged liability in respect of Drafts Payable,
Telegraphic Transfers, Mail Transfers, Cash Orders, Pay Orders, Banker's Cheques, Travellers'
Cheques, Pay Slips, Gift Cheques and similar instruments.
The amounts required to be disclosed under the above sub-head comprise instruments issued by the bank (or
its duly constituted agents/correspondent banks in India or overseas) against consideration received in cash
or by debit to the account of the customer on whose instructions, the instrument was issued, such instruments
constituting a monetary obligation of the Bank to be honoured at any branch of the Bank; and in the books of
the Bank, the credit precedes the payment/debit.
b) Amounts deposited with the bank by constituents against cheques/instruments issued by them e.g. to pay
dividend/ interest to shareholders/debenture-holders, in discharge of their (constituents') liability, will not be
treated as part of 'Bills Payable'.
c) Special care needs to be taken as regards old/large outstanding entries comprising Banker’s cheques, Pay
orders/slips and particularly if these instruments remain undelivered.
d) Internal controls/safeguards over unused security paper/stationery intended for the purpose aforesaid,
are extremely important and total compliance of the internal control procedures is imperative. Any breach of
system should be viewed seriously as this is a fraud prone area.
e) Most banks treat items relatable to the above head as transactions on behalf of Head Office and the sum
total of originating credit entries is transferred to Head office to be set off against the responding debits
communicated by other branches discharging the liability. The net credit for the time being comprises ‘Bills
Payable'. To the extent the entries are routed through Inter branch Account, the debits/credits are matched on
a centralized basis, for the purpose of reconciliation, as in case of other inter-branch items. The accounting
procedure of the bank must, therefore, be understood.
f) Special care needs to be taken as regards debits comprising payments without receipt of
advices/communications from the branches/offices/agents from which the instruments originated or issued; as
also, in case of newly opened branches/accounts, where instruments of large amounts are presented for
payment. Unmatched debits in the process of reconciliation or where there are no corresponding credits
outstanding (including in Inter branch Adjustments, wherever the centralized system is followed), must be
enquired into.
3. Inter-Office adjustments (Net)
a) The Branch usually maintains a Head Office Account, in which there can be no originating debits (unless
specifically permitted by the Controlling Office/Head Office, e.g., at the time of annual closing). The
originating credits that arise are squared up through the Head Office, by a responding debit to square up the
transitory entries that remain in nominal designated sub heads till squared up through the Head Office
Account. There cannot be long outstanding entries in the transitory/nominal sub heads; and if there are debits
over six months old, these call for reporting/ provision.
b) Auditors need to be familiar with the system of Inter branch reconciliation. While matching may be done on a
centralised basis for debits/credits relatable to inter-branch items arising at branches the reconciliation
process and adjustments have to be taken care of at the decentralized level. When the unresponded
entries are adjusted inter-se the branches based on communications:
. from the centralized computer cell where matching of debits/credits is done, or
. directly exchanged inter-se the branches.
c) Special care needs to be taken to ensure that items of Inter Bank nature do not creep into this head, where
for instance there are Draft drawing arrangements with another Bank which is funded for this purpose, or
advances wrongly parked and reversed post the balance sheet date.
4. Interest Accrued:
a) interest accrued but not due must be shown under the above sub-head only in respect of:
i) deposits; and ii) borrowings.
b) Interest payable on:
- staff security deposits, - margin deposits, if any, not included in "deposits",
- participation certificates on risk-sharing basis, - other items not included in deposits/borrowings, etc. is not
be disclosed under this sub-head but to be included against the sub head "Others (including
provisions)".

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NOTES AND INSTRUCTIONS – OTHER LIABILITIES AND PROVISIONS (Contd.):
5. Others (including provisions):
a) Under the above sub-head are to be included all residue items not covered by any specific head/sub-head,
including:
 Unexpired discount/rebate on bills discounted i.e., where part of receipt comprising discount charges on
bills purchased relate to the period beyond the year-end,
 Staff security deposits (and interest accrued thereon),
 Security deposits received from contractors etc.
 Cash margins against guarantees/ Letters of Credit etc.
b) Advances of expenditure nature, like LTA/ Travelling etc. shown as part of "Other Assets", are required
to be provided for, and to be netted while preparing the Bank’s balance sheet. At the Branch it is necessary
to review such advances (under Other Assets) to ascertain that provisions need to be recommended against
the same , unless these are taken care of as part of the usual and necessary provisions made at Head
Office. At the Branch level, the figures may not require to be netted out. The auditor should look into the
relevant H.O. instructions in this regard.
c) Certain items are required by banks to be included under the above sub-head, but these (usual and
necessary provisions), are not normally accounted for at the Branch level, e.g.,
 Provision for taxation,
 Provision for loan losses/doubtful advances,
 Surplus/Ad hoc provisions for doubtful advances (and diminution in the value of investments, if any at
the designated branch),
 Contingency funds not transferred to, or considered as part of, published reserves, and funds
earmarked for specific purposes,
 Depreciation/amortization on assets (where the system of the Bank so warrants),
 Provision for old/unreconciled debits accumulated in Inter branch accounts,
 Proposed dividends/transfer of surplus to Govt. etc.,
 Provision for arrears of staff salary on settlement, bonus, etc.
 Provision for terminal benefits to employees.
The Branch audit programme does not cover verification of these items, and the Branch Auditor's Report
should cover this aspect .
6. Long Form Audit Reporting requirements must be referred to and kept in view for reporting.

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CASH AND BALANCES WITH RESERVE BANK OF INDIA: NOTES /INSTRUCTIONS:
I. Cash in hand (including foreign currency notes)
II. Balances with Reserve Bank of India:
i) In Current Account
ii) In other Accounts
2. Cash:
a) In physical verification:
i) checking must be undertaken of all balances simultaneously at all locations (including for
extension counters and ATM(s), if operated by the Branch), either before banking hours or after cash
counters for public dealings are closed ,so as not to cause inconvenience to the branch in dealing
with their constituents.
ii) actual counting may be undertaken for:
@
NEW NOTES - bundles with packing/seals intact should be counted
OLD NOTES - bundles with packing/seals intact should be counted with a sample
check of few bundles
LOOSE/SOILED NOTES - should be counted in full
COINS - should be counted in lots or by weight.
In large to medium sized branches, including Currency Chests, there is facility of currency/coin
counting machines/ currency sorting machines, that can be used for physical count.
iii) Notes/coins in sealed packets pending investigation/enquiry, should be accepted as such
under a confirmation from the branch management and a note taken on record.
iv) ATM balances as per the daily rolls from the ATM Machine should tally with the book balance and
unrecorded entries will comprise non debit to customers of the same or another branch or debits on
other banks. All ATM balances will be in round figures and comprise notes of the denominations stuffed
in the machines. Any odd balances in ATMs shall require be enquiring into and reporting.
Some banks have appointed agents who are charged with the responsibility of physically stuffing cash
into the ATMs, out of cash given to such agents. Auditors must examine, and report (LFAR); as also if
the bank has assumed the risk of loss of such cash while it is with the agents.
b) Effect of inward foreign currency parcels originating from other branches prior to, but not recorded
up to, the year-end must be reported, at the designated Foreign Exchange branch being audited.
c) Cash balances, if generally observed as varying significantly from the norms fixed by controlling
authority for the Branch or those far in excess of normal requirements, must be covered in the LFAR.
Normal requirements can be gauged from the inflow/outflow of funds (for the period covered by test). This is
relevant particularly if the branch has currency chest facilities or operates a local current
account with another bank.
d) Large volume of soiled/unusable/non exchangeable notes not exchanged/ held since long, must be taken
note of and reported in the LFAR.
It would be necessary to review and report [Refer Para 1.1(a), (b), (c) and (d) of the LFAR], also on:
- inadequacy of insurance cover in relation to cash retention by the Branch,
- breach of H.O. instructions relating to effective joint custody of cash, and
- non-verification of cash at periodic intervals by the authorised officials.
e) Refer to Head Office instructions relating to foreign currency rates, wherever foreign currency is held.
@ Non stapling of fresh/ issuable Note Packets, tendering of soiled notes and non mutilation
In exercise of the powers conferred by Section 35A of the Banking Regulations Act, 1949, the Reserve Bank of
India(RBI) , directed vide its Circular to banks ( DBOD No. Dir. BC. 42&43/13.03.00/2001-02 dated November 7,
2001) that with immediate effect, the banks shall: do away with stapling of fresh / re-issuable / non-issuable note
packets, and instead secure note packets with paper bands;sort notes into issuable and non-issuable, and issue only
clean notes to public;tender soiled notes in unstapled condition to RBI in inward remittances through Currency
Chests; forthwith stop writing of any kind on watermark window of bank notes (instructions reiterated frequently)
Demonetisation (cash exchange/deposits of demonetized currency notes)
Auditors need to make specific enquiry from Management as to whether there is anything observed as
adverse or causing detriment to the bank , pursuant to their implementation of the demonetization scheme,
whether through any investigation/review/inspection/examination/enquiry/vigilance etc., as may be a matter
of concern , including the involvement of fraud by employees/customers), and require them to draw
attention of the auditors thereto for consideration.
Attention is also drawn to Master Direction DCM(CC) No.G -2/03.35.01/2016-17 dated July 20, 2016-Master
Direction on Levy of Penal Interest for Delayed Reporting/Wrong Reporting/Non-Reporting of Currency Chest
Transactions and Inclusion of Ineligible Amounts in Currency Chest Balances, particularly Para 2 which deals with
Penal interest for inclusion of ineligible amounts in the currency chest balances and mandates that Penal interest
will be levied in all cases where the bank has enjoyed 'ineligible' credit in its current account with Reserve Bank on
account of wrong reporting / delayed reporting/non-reporting of transactions. Penal measures will also be taken in
cases of shortages in chest balances / remittances, shortages due to pilferage / frauds, counterfeit banknotes
detected in chest balances / remittances as per the prevailing “scheme of Penalties.
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CASH AND BALANCES WITH RESERVE BANK OF INDIA: (Contd.)
NOTES /INSTRUCTIONS:
3. Balances with Reserve Bank of India (RBI):
a) Only few branches are designated to have account(s) with RBI and the audit procedure would be
applicable only at such branches or those having Currency Chests but not maintaining RBI Accounts.
Withdrawals from, or deposits into, the Currency Chests operated at the branches of the Bank, have an
impact on the RBI Account(s) maintained by the Bank , through such designated branches, as all such
withdrawals and deposits are expected to be simultaneously recorded in the RBI Account(s), whether
maintained at the Branch or a Linked Branch.
If the Branch that maintains a Currency Chest also has the account with RBI in its books, the entries for
deposits into and withdrawals from the Currency Chest are made simultaneously (evidenced by Currency
Chest Slips), in the account of the RBI maintained at the Branch.
The designated Branch also acts as a Link Branch for other branches of the Bank, to which Currency Chests
are attached, but do not maintain an Account with RBI in their books. In such branches, all withdrawals
/deposits in respect of the Currency Chest, are communicated promptly through Inter Branch Advices for
accounting entries to be made in the Account of RBI at the Link Branch.
MOC needs to be passed at the branch maintaining RBI Account, in respect of currency chest
deposits/withdrawals originating prior to the year end at the linked branches that have currency
chests, but responded after the year end. This will negate the effect of RBI entries lying at the year end in
Inter Branch Account. This can be done by scrutiny of the entries after the close of the year , on a value date
basis.
b) Where RBI account is maintained, the relevant balance confirmation/pass sheet from RBI must be obtained
in evidence of the balance at the Branch as at the year-end.
c) It would be advisable if a note is taken of old outstanding transactions in Bank reconciliation statements year-
wise, separately for debit and credit items and a written explanation sought from the Branch
Management as to the precise reasons for non-adjustment of these items. Unreconciled debit entries need
provision, net of related credits.
d) It would be appropriate to ascertain the periodicity of reconciliation of balances by the Branch with those as
per statements/confirmations of Reserve Bank of India.
e) Reference may be made to RBI Master Circular DCM(CC) No.G - 1/03.35.01/2015-16 dated 1-7-2015 for
Levy of Penal Interest for Delayed Reporting/Wrong Reporting/Non-Reporting of Currency Chest Transactions
and Inclusion of Ineligible Amounts in Currency Chest Balances.
The minimum amount of deposit into/withdrawal from currency chest will be Rs.1,00,000/- and thereafter, in
multiples of Rs.50,000/- and the time limit for reporting by Currency Chests should be through ICCOMS on the
same day by 9 PM by uploading data through the Secured Website (SWS) to their respective link offices; and
such link offices must report the consolidated position to the Issue Offices latest by 11 PM that very day.
Failure will involve penal interest, including for delay in
submission of Currency Chest slips .
It is imperative to look into the effect of currency chest operations on the accounts of the Bank and
report precise adjustments (Head-wise),required to be made. Even if the Branch is not maintaining an
account with Reserve bank of India but operates a currency chest, this matter will have relevance as it
may affect the account of RBI maintained at the link branch as aforesaid.
f) The heads/sub-heads of account which gets affected must be reported along with the figures, where entries are
suggested in RBI Account.
g) LFAR [Refer Para 1.2 (b)(iii)], requires reporting on unexplained/ unadjusted entries between 6 months and 1
year, and those above 1 year.
h) Interest on balances maintained with RBI upto the year end needs to be verified. This may be centralised
at one designated office. In case the non adjustment at the branch is not explained satisfactorily, this
must be reported.

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BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE:
NOTES AND INSTRUCTIONS:
1.Legal Requirements of disclosure:

I. In India:
i) Balances with Banks:
a) in Current Accounts
b) in other Deposit Accounts
ii) Money at Call and Short Notice:
a) With Banks
b) With Other institutions
II. Outside India:

i) in Current Accounts
ii) in Other Deposit Accounts
iii) Money at Call and Short Notice
2. Balances with Banks:

a) Under this head would be included balances with other banks (State Bank of India, its subsidiaries and other
banks/institutions), carrying on the business of banking.
As per R.B.I., the term "bank(s)" would include banking companies, nationalised banks, S.B.I., associate
banks and other institutions, including cooperatives carrying on the business of banking, whether or
not incorporated or operating in India; and also would include NOSTRO Accounts.
b) Balance confirmation certificates produced in evidence of balances with other banks must be examined to
ensure that these are issued by the other banks confirming, as per their books, the balances with the
Branch being audited.
c) It is recommended that large and unusual transactions, particularly towards the year-end be reviewed to
determine their nature.
Any adverse observations should be considered in the report.
d) Bank’s branches using the Currency chests of other banks, should ensure that the entries are recorded
through Inter Bank Adjustments, simultaneously with the deposit of /withdrawal of cash at such
currency chests.
The manner of recording such entries is relevant; and it should be ensured that the responding entries
are simultaneous and not cleared by receiving of bank drafts/bankers cheques with a time lag, where
deposits are made.
e) Generally, balances held in current accounts with other banks may be reviewed and reasons for holding
unusually large and unutilized/stagnant balances with such banks, may be ascertained; and in case these
are far in excess of those considered necessary, these should be reported in the LFAR; unless the Branch
management has cogent reasons for holding such balances for long durations of time.
f) Provision may be recommended for old/large unadjusted entries at debit, particularly where these
cannot be satisfactorily explained, and if doubtful of realization.
Any item(s), deserving the special attention of the management including outstanding
balances remaining unexplained/unadjusted for a period between 6 months and 1 year and those
over a year must be reported in the LFAR.
g) The bank reconciliation statements as at the previous year- end should be scrutinized and adjustments arising
from pending entries therein reviewed to ensure that there is no forced/wrong adjustment thereof.
h) Deposit Accounts with Banks, if in odd figures, may be enquired into as deposits are normally expected to be
in round figures; and interest verification can be done to check interest accrued till the year end at the
contractual rate.

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BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE: (Contd.)
NOTES AND INSTRUCTIONS:
3. NOSTRO Accounts
a. These Accounts are accounts maintained in foreign currencies with banks/correspondents
overseas, for convenience of constituents’ transactions in foreign currencies. These accounts are
generally maintained at designated branches of the Bank or with other banks (Correspondents).
b. NOSTRO Accounts should invariably have debit balances; and reasons for credit balances need to
be enquired into and adjustments routed through the Memorandum of Changes.. with effect of
foreign exchange rates.
It would be inappropriate to show such balances as “Borrowings”
c. Only the aggregate of debit balances in NOSTRO Accounts will be included under the above head.
d. Review needs to be made of transactions originating in the accounts of the foreign

banks/correspondents prior to but recorded by the Branch after the year end, as these have an
effect on the closing balances, firstly in terms of foreign currency balances and the consequential
effect on foreign currency conversion
e. Balances in NOSTRO Accounts must, therefore, be evidenced by confirmation certificates and

only after considering the effect of entries having impact on year-end balances, should the
foreign currency balances be converted into Rupees; also to determine the profit/loss on
exchange.
f. If FAX/ e mail confirmations are available in respect of NOSTRO Accounts, a hard copy (duly
authenticated), must be retained as part of the working papers.
(Note: VOSTRO Accounts are balances maintained (in Rupees),and operated by the foreign
banks/correspondents - at designated branches of the Bank and are to be reckoned in the Deposits portfolio).
Year-end confirmation procedures must be applied to Vostro balances as well.
4. Money at Call and Short Notice:

(This activity is only at designated few offices of the Bank, generally at the Treasury Branch).
a) According to R.B.I., Money at call and short notice includes deposits lent in the inter-bank call money
market, repayable within 15 or less than 15 days' notice.
Amounts deposited/lent in excess of the said period should be disclosed as under;
- with banks-as Deposits(in Schedule 7-item I(i)(b)), or

- as Advances(in Schedule 9) depending on the nature of placement/deposit; or
- with other institutions-as Advances(in Schedule 9).
b) Moneys at call and short notice can be placed:

- only at designated branches of the Bank, and
- only under due authorisation of the Head Office/ Controlling authority.
c) Moneys at call and short notice are expected to be in round figures. If otherwise, enquiries must be made to
ascertain the nature of lending, for correct classification thereof.
d) It is recommended that adjustments may be checked for interest accrued on year-end outstanding balances
of Money at Call and short notice, and subsequent realisations be verified.

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NOTES AND INSTRUCTIONS - INVESTMENTS
1. Legal requirements as to disclosure: Remarks/Nature

I. Investments in India in:
i)Government Securities Cover central/State Govt. securities and

Govt. Treasury Bills.
ii)Other approved Securities Comprise securities as per section 5(a) of the
Banking Regulation Act, 1949
- as per section 20(a),(b), (bb),(c), (d), (f), of
the Indian Trusts Act, 1882.
iii) Shares Of Companies/Corporations
iv) Debentures and Bonds of companies/(corporations
v) Subsidiaries and/or joint ventures ) include investments in subsidiaries/ associate
companies and joint ventures.
vi) Others (to be specified) residual investments like gold, commercial
paper and other instruments
II. Investments outside India in:
i) Government Securities foreign Govt. securities including of local

(including local authorities) authorities
ii) Subsidiaries/joint ventures share capital of abroad subsidiaries floated
outside India
iii) Other Investments (to be specified) residual investments
Investments in/outside India have also to be
disclosed separately at Gross Value, Provision for
Depreciation and Net Value, as per the
instructions of RBI
2. The work relating to Investments is generally centralised in most banks, and entries for purchase or sale or holding
appear in the books of the branch. Some branches may hold investments on behalf of the Head Office/
Centralised Investment Cell, generally for collection of income thereon.
3. Investments held in safe custody on behalf of constituents or as security against advances, even if held in the
Bank's name should not be taken as the Bank's investments but as part of the documents comprising security for
advances to borrowers. Accordingly, income received on the same is to be credited to the constituents'
accounts.
4. Investments, if held at the branch, if not physically verified or in respect of which no documentary evidence is
available must be reported, with details thereof incorporated in the long form audit report.
5. The LFAR vide Para 1.4(A), requires response to items (a) to (e) of the questionnaire for branches in India.
6. The RBI Master Circular (DBR No BP.BC.6/21.04.141/2015-16 dated 1.7.2015), relating to the prudential
norms on classification, valuation and operation of investments, is recommended to be seen for the purpose of
knowledge; particularly as to the manner of valuation/carrying cost of investments shifted inter se the
categories (Held to Maturity/Available for Sale/Held for trading).
7. Reference may also be made to the RBI Master Circular DBR.BP.BC No.23/21.04.018/2015-16 dated 1-7-2015
with regard to the disclosure requirements.

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NOTES AND INSTRUCTIONS – ADVANCES:
A. i) Bills purchased and discounted

ii) Cash credits, Overdrafts and loans repayable on demand
iii) Term Loans
B. i) Secured by tangible assets
ii) Covered by Bank/Government guarantees
iii) Unsecured
C. I. Advances in India:
i) Priority sectors
ii) Public sector
iii) Banks
iv) Others
II. Advances outside India:
i) Due from Banks
ii) Due from Others:
a) Bills Purchased and discounted
b) Syndicated loans
c) Others
2. It will be observed from the legal requirements of disclosure, that advances which are good and recoverable,
are required to be disclosed and the classification is based on:
a) Nature and Maturity:
 Short-term in respect of bills, overdrafts, cash credits and loans repayable on demand
etc.
 Longer term in respect of Term loans, which are expected to be given for periods
exceeding 36 months. (amounts include overdue installments)
b)Security and guarantee
 Security of tangible assets, (both primary and collaterals) and including
against book debts treated as tangible
 Guarantee by bank/Govt. including DICGC/ECGC)/ CGFSSI
(Most of the Banks have given up DICGC coverage).
 Unsecured. Include clean loans where the bank has no security cover
c) Location in /outside India
d)Sector-wise as under
for advances in India:
 Public includes undertakings which under statutes sector are treated as public
sector
 Priority which includes public sector advances falling in priority sector
 Banks covers banks, as defined

 Others covers residual category
The Branches which maintain the borrowers' accounts, would have to separately identify/disclose, in the branch
returns, advances in accordance with the RBI applicable guidelines/ norms, so that (based on internal
categorisation as sub-standard/doubtful/loss assets), provision is considered; and such provision must be to the
satisfaction of the auditors. Provision (including prudential/floating/generic) and technical write-off etc. is usually
considered at a centralised level as per the accounting practice prevalent in most banks.
{Reference needs to be made to the RBI Master Circulars dated 1-7-2015 DBR.No.
BP.BC.2/21.04.048/2015-16 - Prudential norms on Income Recognition, Asset Classification and
Provisioning pertaining to Advances and other relevant circulars ( refer also Section E); and Master
Circular DBR.BP.BC No.23/21.04.018/2015-16 with regard to the disclosure requirements.}

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NOTES AND INSTRUCTIONS – ADVANCES: (Contd.)
3. NOTES:
 Advances mean laying out of bank's funds and include overdrafts in Deposit Accounts, invoked guarantees,
credit card dues; and exclude interest-free Advances as Employer to the employees. It would be useful to refer
to have a broad understanding of how the gross advances as recorded at the branch get disclosed net of provisions etc.
at the Bank level.
Note: While sanctioning other fund based credit facilities, limits for non fund based facilities are also
simultaneously sanctioned by banks and these can be divided in three broad categories , viz., Letters of credit,
Guarantees and Co-acceptance of bills/deferred payment guarantees (such co-acceptance limits may also be
sanctioned under Bill Rediscounting Scheme of designated institutions). Till these crystallise, the amount does not
become an advance.
 There is no sub-head in the annual financial statements, to show doubtful advances not provided for by
banks.
4. Relief for MSME Borrowers registered under GST:

As per RBI Circular No. DBR.No.BP.BC.100/21.04.048/2017-18 dated 7.2.2018, the MSME borrowers shall continue to be
classified as a ‘Standard Asset’ in the books of Banks if there is a default in servicing of the advances for over 90 days,
subject to the following conditions:
 The borrower is registered under the GST regime as on January 31, 2018.
 The aggregate exposure, including non-fund based facilities, of banks, to the borrower does not exceed Rs. 25 crore as
on January 31, 2018.
 The borrower’s account is standard as on August 31, 2017.
 Overdue accounts as on September 1, 2017 from the borrower and those due between September 1, 2017 and January
31, 2018 are paid not later than 180 days from their respective original due dates.
5. While provisions for doubtful advances is statutorily required to be made to the satisfaction of the auditors, RBI desires that
a uniform approach be adopted in this regard; and issues guidelines to prescribe the minimum bench-marked
percentages/basis on the borrowal accounts, based on internal classification/categorization as per the account health status
of the borrowers. Based on the criteria laid down as per the Guidelines for the time being in force by RBI, the Borrowers need
to be so internally categorised into Standard and Non Performing Advances (comprising Sub-Standard, Doubtful or Loss
Assets). Based on the compliance or otherwise of the discipline imposed on the borrower in terms of the sanction of
facilities, the borrower is placed in the category that corresponds to the most adverse features/ parameters observed in
servicing any of the facilities /account by the borrower.
The objective and purpose of such categorization is two-fold:
a. To consider provision for debts considered doubtful
b. To consider recognition/derecognition/non recognition of income
While provisions are expected to be made for all accounts of the borrower based on such health status categorization (at
minimum bench-marked percentages/basis prescribed), certain exceptions have been made for some accounts outstanding
that need a varying treatment for classification/categorization and provisioning, e.g., in fresh/additional facilities in accounts
subjected to restructuring/BIFR cases, Central Govt. guaranteed accounts etc.
Proper categorisation will lead to the minimum bench-marked provisions being considered as per the applicable Regulatory
norms; and income being generally accrued/ recognised on Standard Advances; and based on realisation in case of Non-
performing advances (NPAs). (Refer also Section E)
Since provision for bad and doubtful debts has to be statutorily made to the satisfaction of the auditors,
examination of the health status/categorization of the advances and provision required for bad and doubtful
amounts, assumes significance and constitutes a very important part of the audit.
6. It is imperative that the audit procedures cover:

a) Documentation -particular to the status of the borrower (individual/firm/company/Society/ Trust etc.)
-particular to the nature of security (pledge, hypothecation, mortgage, lien etc.)
b) Operation whether the account of the borrower is stagnant or there is a healthy turnover, based
on his business operations and considering the purpose for which the facilities are granted
c)Security/ guarantee the existence and market value of the tangible assets/security (primary and collateral) that
will secure the bank in the event of default in servicing of the loans/advances; and the
nature and extent of any guarantee cover available that also provides the bank a room for
fall back to recover the amounts in default.
d)Advance outstanding the balance and correctness of outstanding as at the year- end
7. The nature and type of adverse features in respect of advances which would have a bearing on
the health classification, can be known through proper scrutiny of the advances accounts - account-wise/ borrower-wise
for each of the facilities.
Attention is drawn to the LFAR requirements vide Item 1.5 (a) to (e) .
It is recommended that notes may be taken indicating the nature of adverse features, preferably using numerical codes
(as suggested in Section C III )for the purpose of convenience; for example, notes/report could be taken in the form as
per Section C II, which will also be the basis of the MOC to be numbered D 6.1.1

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8. The terms Pledge, Hypothecation, Mortgage, assignment are used for creating a charge on the assets
of the borrower to secure the lender , in the event of a default by the former in repayment of his/its
obligations as contracted.
Pledge involves the lender (pledgee) taking delivery/physical possession of , and having control over the
moveable assets ( goods, fixed/term deposits of the borrower with the Bank, IVPs, KVPs, NSCs,
gold/jewellery etc.); and in the event of a default by the borrower, the pledgee has a right to realize the
proceeds of sale of the assets pledged to recover the principal and interest contractually due. (Refer Section
172 of the Indian Contract Act which defines pledge as the bailment of goods as a security for the payment of
a debt or performance of a promise).
Hypothecation, as defined under the Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, is "a charge in or upon any movable property, existing or future, created by a borrower
in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a
security for financial assistance, and includes floating charge and crystallization into fixed charge on movable
property". Hypothecation involves the creation of a charge against the security of movable assets, without the
borrower physically parting with the possession of the assets. The lender will have to invoke the security to
realize the amounts in default.
Mortgage , as defined in Section 58 of the "Transfer of Property Act 1882” is the transfer of an interest in
specific immovable property for the purpose of securing payment of money advanced by way of loan.
Mortgage involves the creation of charge against immovable property which including land, buildings or
anything that is attached to the earth or permanently fastened to anything attached to the earth.
Assignment involves the transfer of intrinsic rights, title and beneficial interest under a contract by the assignor
to the assignee (lender) , e.g., the assignment by way of transfer of rights of , and benefits under, a life
insurance policy ( by the policy holder, the assignor) to a lender (the assignee), as a collateral for a loan. In
the event of the death of the assignor, the assignee is paid first and the residue (if any) is paid to the
beneficiary entitled under the policy.
The types of facilities usually provided by the banks and the terms normally used in connection
therewith are given in brief below:
a) Hypothecation (Stocks, book debts, other movable assets, collateralized receivables).
b) Pledge/lock and key facility (tangible movable assets), pledge of shares and securities .
c) Mortgage of property (Registered/Equitable), usually as additional/collateral security
d) Trust Receipts
e) Lien marked fixed/term deposit receipts of the bank, shares of listed companies, assignment of Life
Policies, IVPs, KVPs etc.); or clean advances, which sometimes arise due to adverse balances in
Savings/Current Accounts without any formal authority/sanction
f) Packing credit (Pre-shipment/post-shipment) and other Export loans.
g) Bills facilities ( Overseas and inland Bills purchased and discounted, clean D.D.'s, Advances
against bills for collection etc.).
g) Consortium Advances, syndicated loans and on the basis of participation on risk sharing/ non-risk
sharing basis).
The facilities are sanctioned, based on appraisal; and the terms and conditions stipulated in documents
executed copies of which need to be given to the borrowers.
Banks also assume obligations on behalf of its borrowers by way of guarantees, Letters of credit/comfort etc.
as part of the agency functions, in consideration of commission/fees.
Note: The terminologies and abbreviations used by the bank must be understood clearly when
checking is undertaken to determine the nature of advance/facility.
9. The operations in all major borrowers' accounts must be reviewed and should a detailed scrutiny be called
for due to any unhealthy trends noticed, the account should be carefully looked into, including in the post-
audit period. Large transactions, particularly as at the year-end, in accounts may be reviewed and detailed
notes may be kept on record as to irregularities, if any, noticed in the course of audit in these accounts. A
written note/explanation may be taken and kept on record as regards major/material irregularities in any
account on which any observation is being reported, after obtaining for record, the Branch Management's
view-point.
10. In view of the large number of accounts at many of the branches the audit programme would involve in-
depth checking of selected borrowers' accounts (including the large accounts. The extent of checking/tests to be
applied will depend upon the effectiveness or otherwise of the internal control procedures and the implementation
of the standard procedures laid down by the bank. The matter of classification of debts into those considered
good or doubtful would involve a fair view being taken of the debts, party- wise including for large advances
and others selected for audit coverage.
11. The satisfaction of the Branch auditor would over-ride that of Management in the matter of the health
classification of the advances that has effect on the provisioning and income recognition.

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12. For purpose of classification of the Advances, the following must be kept in view:
a) Documents, which are usually prescribed for each category of borrower/facility, are properly executed in each
case examined, are complete and in force. Blank documents if held by the Branch in respect of any
borrowal account, should not be accepted as proper documentation in any account.
Over - documentation having the effect of contradiction in terms for classifications must be reported.
b) Where documents are not reviewed/renewed for the stipulated period to classify the borrower as NPA, it should
also be verified as to whether the limitation period has expired. Normally the Branch would have balance
confirmations which extend the limitation period.
c) Evidence should be available on record as to:
- Existence of assets/property charged as security (primary/collateral);
- The market value and realisability of the security, which should preferably be got reassessed periodically,
particularly in cases where the accounts are categorised as non-performing and are in the doubtful or
loss category. The condition and quality of the movable assets and encumbrances to immovable
properties, and factors which dilute the security, are relevant in valuation.
- Credit guarantee cover of institutions like DICGC./ECGC/CGTSI/ Banks (including Cooperative banks).
For the purpose of disclosure in the financial statements, the amounts covered only by guarantees
including Banks/Govt. are to be considered as not secured by tangible securities, even though
they may be good for recovery).
d) Confirmation/evidence is available that:
- hypothecated / pledged goods belonging to the borrowers, are paid for by the borrowers, and are
not old/ obsolete or unsaleable.
- advances against book debts of borrowers relate to their current debts and not old/ doubtful debts
as per sanction terms.
(advances against book debts, not being against tangible assets, are unsecured. Though, as per
RBI directions these are to be disclosed in the financial statements, as secured(by so indicating as
part of the disclosure in the Balance Sheet).
e) insurance policies covering primary and collateral security, are adequate and in force as at the year-end
and cover the Bank/Branch against any risk to the assets charged.
f) in case of companies, where the charge is required to be registered with the Registrar of Companies (except
in case of pledge facilities) whether the certificate of Registration of charge or evidence of such
charge having been registered, is held.
g) Whether borrowers are regular in complying with supply of the requisite information and financial data
and particularly as to the value of primary and collateral security.
h) Whether the financial data as to the party/guarantors, is kept upto date and is available for audit inspection.
It may be relevant to state that it is the NET WORTH of the guarantors that is relevant in case guarantees are
to be invoked.
i) Whether frequent overdrawing beyond Drawing Power/ sanctioned limits is permitted to the borrowers
and whether there is a healthy turnover in the borrowers’ accounts. (Stagnant accounts and those in
which the turnover is low should particularly be carefully looked into).
j) adverse comments, if any, on any borrowers accounts appearing in the latest available
- branch auditor's report(s),
- inspection reports of bank officials/R.B.I,
- manager's handing over charge report when incumbent is changed,
- concurrent auditor's report(s),
- any other special report covering advances,
should not be ignored in making classification.
Attempt to upgrade classification of advances from an adverse category to a better one, having the
consequence of reversal of provisions must be looked into.
13. In respect of bills purchased and discounted, the auditor should in particular examine the following:
a) Party-wise outstandings as at the year end.
b) Whether the bills are for genuine trade transactions and are current (and are not overdue/matured).
c) Documentary bills are supported by related documents evidencing the security, e.g. R.Rs, L.Rs etc.
Irrespective of whether they are clean or documentary, usance or demand, Bills must relate to genuine
trade transactions and not be accommodation bills. One needs to exercise a caution in case of
sequentially numbered and repetitive invoices made in respect of sister concerns and other related
parties, invoices being in round figures, frequent returning of bills and their substitution by fresh bills or
by direct payments by drawers, billing in round figures, bills involving the same set of drawees, or
different drawees at identical addresses, tendering of sequentially numbered lorry receipts (LRs) of only
one particular transport company, drawing bills disproportionate to borrower’s business standing,
repetitive delays in retirement of bills by drawees, frequent instructions of the drawers to deliver
documents free of payment etc.

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14. In case of consortium/multiple banking arrangements , the corporate borrowers are expected to comply with the RBI
Guidelines and obtain certificates from a C.A./Company Secretary/Cost Accountant (Refer RBI Circular
DBOD.BP.BC.46 and 110/08.12.001/2008-09 dated 19-9-2008 and 10-2-2009 respectively).
15. Though RBI has directed that in case of advances under consortium arrangements, the classification of the
accounts would be determined only on the basis of the operations in the account with the Bank,
independent of others, the auditor should carefully look into the health of the account, in case other banks
have a classification more adverse than as made by the bank, and to see if it otherwise is intrinsically weak
deserving a reclassification.
16. Deposits made in the form of demonetized currency (Specified Bank Notes) in the Advances Accounts , by
borrowers, or on their behalf, and duly accepted by the banks, should be considered as acceptable
transactions, unless these are challenged by any investigative procedures, and having pecuniary
consequences on the bank’s financials and having effect on the true and fair view of the state of affairs or
operating results of the bank/branch.
17. Reference may also be made to Section E and E I , as also:
- Section E II which summarises the RBI prudential norms and the Reckoner may be found useful as
regards classification of Advances; and
- Section E III for provisioning and income recognition, based on categorization of the borrowers.
Reference
Master Circular DBR.No.BP.BC.2/21.04.048 / 2015-16  Part A – General Guidelines
dated 1.7.2015 - Prudential norms on Income  Part B – Prudential Guidelines on Restructuring
Recognition, Asset Classification and Provisioning  Part C – Early recognition of financial distress
pertaining to Advances and also RBI Circular No.
DBR.No.BP.BC.101/21.04.048/2017-18 dated 12.2.2018 –
Resolution of Stressed Assets – Revised Framework
Master Circular DBR.No.BP.BC. 37 /21.04.048/2015-16 Provides an additional 60 days period beyond what is
dated November 21, 2016 - Prudential norms on Income applicable for the concerned regulated entity (RE) for
Recognition, Asset Classification and Provisioning recognition of a loan account as sub-standard in certain
pertaining to Advances cases.
Master Circular DBR.No.BP.BC. 49 /21.04.048/2015-16 Provides an additional 30 days beyond 60 days period
dated December 28, 2016 - Prudential norms on Income applicable for the concerned regulated entity (RE) for
Recognition, Asset Classification and Provisioning recognition of a loan account as sub-standard in certain
pertaining to Advances cases mentioned in the November 21, 2016 circular.
DBR.No.BP.BC.30/21.04.048/2015-16 July 16, 2015 To provide operational flexibility to credit card issuers,
(Prudential Norms on Income Recognition, Asset with effect from the date of the circular, ‘past due’ status
Classification and Provisioning pertaining to Advances – of a credit card account for the purpose of asset
Credit Card Accounts classification would be reckoned from the payment due
date mentioned in the monthly credit card statement.
DBR.No.Dir.BC.10/13.03.00/2015-16( 1-7-2015 ) Loans and Advances – Statutory and Other Restrictions.
Master Direction FIDD No.FSD.BC.2/05.10.001/2016-17 Relief Measures by Banks in Areas Affected by Natural
July 1, 2016 ( Reserve Bank of India (Relief Measures by Calamities
Banks in Areas Affected by Natural Calamities)
Directions, 2016
FIDD.No.FSD.BC.52/ 05.10.001/2014-15 dated March 25,
2015 - Guidelines for Relief Measures by Banks in Areas
Affected by Natural Calamities
Master Circular FIDD.MSME & NFS.BC.No.07/ 06.02.31/2015-16 (1- Lending to Micro, Small & Medium Enterprises (MSME) Sector
7-2015) and also RBI Master Directions FIDD.MSME &
NFS.12/06.02.31/2017-18 dated 24-7-2017
FIDD.CO.Plan.BC.54/04.09.01/ 2014-15 dated April 23, Agriculture: The distinction between direct and indirect
2015 - Priority Sector Lending-Targets and Classification agriculture is dispensed with; but defines “Farm Credit”.
Bank loans to food and agro processing units will form
part of Agriculture
FIDD.CO.FSD.BC.No 9/05.02.001/2016-17 August 4, 2016 Implementation of the Scheme for the year 2016-17 for
(Union Budget – 2016-17 Interest Subvention Scheme short term crop loans upto Rs 3 lakh with certain
stipulations:
FIDD. No .FSD.BC. 19/05.04.02/2016-17 December 26, Interest Subvention Scheme for Short Term Crop Loans
2016 (Interest Subvention Scheme for Short Term Crop during the year 2016-17- Grant of grace period of 60 days
Loans during the year 2016-17 beyond due date
DBR.No.CID.BC.22/20.16.003/2015-16(1-7-2015) Master Circular on Wilful Defaulters.
DBR.No.BP.BC.103/21.04.132/2015-16 dated 13-6-2016 Scheme for Sustainable Structuring of Stressed Assets
DBR.No.BP.BC.33-34/21/04.132/2016-17 dated 10-11-2016 Scheme for sustainable structuring of stressed assets –
revisions
DBR.No.BP.BC.27/21.04.048/2015-16 dated 02-07- Discount Rate for Computing Present Value of Future
2015 Cash Flows.
DBR.No.BP.BC.100/21.04.048/2017-18 dated 07-02-2018 Relief for MSME Borrowers registered under Goods and
Services Tax (GST)

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NOTES AND INSTRUCTIONS – FIXED ASSETS
1. Legal requirements as to disclosure:
I. Premises:
i) At cost as at 31st March of the preceding year

ii) Additions during the year
iii) Deductions during the year
iv) Depreciation to date
2. Other Fixed Assets:(including furniture and fixtures)
i) At cost as at 31st March of the preceding year

ii) Additions during the year
iii) Deductions during the year
iv) Depreciation to date
2. Premises:
a) Normally this item is not dealt with at the Branch and all records are centralised at Head Office. In case the
Branch accounts deal with this head of account the programme stated overleaf should be followed.
In case the documents of title to premises are held at the Branch on behalf of the Head Office/controlling
authority, these should be verified as per instructions of such authority or on behalf of the statutory central
auditors.
As per Accounting Standard (AS) 10, issued by ICAI, Depreciation is the systematic allocation of
depreciable amount of and asset over its useful life and depreciable amount is the cost of an asset, or
other amount substituted for cost, less its residual value. This should also apply to leasehold land, if any,
held by the Bank. It would be appropriate to segregate the cost/value of the land from the building/
superstructures, to ensure that depreciation is appropriately considered particularly in the case of leasehold
land, and superstructures.
b) The value of premises wholly or partly owned by the Bank for the purpose of business including residential
premises, is required to be shown under the above head.
c) The relevant sanction/authority of the Head Office / controlling authority must be examined with
regard to additions/deductions.
d) Buildings under construction, entries in respect of which would normally be recorded in a nominal head of
account, should also be scrutinised to ensure that capitalisation where required is made when due.
e) As per R.B.I. instructions, where sums have been written off on reduction of capital, or if there is a revaluation
of assets, every balance sheet after the first balance sheet subsequent to the reduction or revaluation
should show the revised figures for a period of five years, with the date and amount of revision made.
Disclosure is mandatory in respect of the method adopted to compute the revalued amounts, the
nature of the indices used, the year of any appraisal made, and whether an external valuer was
involved in case the assets are stated at revalued amounts.

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NOTES AND INSTRUCTIONS – FIXED ASSETS (Contd.)
3. Other Fixed Assets (including Furniture and Fixtures)
a) The audit procedures outlined overleaf should be followed in case the branch accounts incorporate the
value of fixed assets.
b) Additions/deductions must be checked with reference to original evidence available at the Branch
along with authorisation of the competent Authority, even where, after acquisition/deduction, the
transactions are communicated for being entered in the centralised records.
c) Insurance coverage, if inadequate or policies not in force, must be reported in the Long Form Audit Report.
d) Assets given on Lease need to be separately shown in same manner as other assets.
e) Depreciation rates may be reconfirmed from the Accounting Policy of the Bank. Special attention is to be
paid for the rate of depreciation on Computers.
(Note: RBI has directed that the rate of depreciation on computers be charged on SLM @33.33% -
refer old Circular No. BP.BC 37/21.04.018/2000 dated 20.10.2000)
(f) Software Acquired
Banks may acquire software at considerable expenditure. The system of recording this expenditure as part
of the fixed assets (so that it may be depreciated) or to defer expenditure (for amortisation over its useful
life) may be reviewed. The Bank’s Accounting Policy in this regard must be enquired into, and a note kept
on record. Non provision for this intangible will not attract the provisions of Section 15 of the Banking
Regulation Act, as per a notification specifically issued by the Govt. of India.
(g) In case of banking companies, they may have to be guided by the provisions of Schedule II to the Companies
Act 2013 as regards depreciation based on useful life of the tangible non current assets.

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NOTES AND INSTRUCTIONS – OTHER ASSETS:
I. Inter-Office adjustments (Net)
II. Interest accrued
III. Tax paid in advance/tax deducted at source
IV. Stationery and Stamps
V. Non-banking assets acquired in satisfaction of claims
VI. Others @
@ In case there is any unadjusted balance of loss (i.e. where the loss exceeds the aggregate of capital,
reserves and surplus), the same may be shown under this item with appropriate footnote.
2. Inter-Office Adjustments (Net):
a) Although all banks show this item separately in their annual accounts, a formal sub-head has been
introduced in the schedule requiring disclosure of the net balance comprising inter-office
transactions which are pending adjustment as at the year-end. The method of recording such entries
and their clearance must be understood.
b) Originating debits are not permitted in Head- Office account. There can be originating credits and
responding debits in such an account. The transitory debits are kept in separate nominal sub-heads
which deserve immediate attention for squaring up. The more liquid the transaction, the quicker
should be the adjustment e.g. entries comprising cash remittances cannot be expected to remain
outstanding at all. Credits invariably precede the debits in the Head Office account.
c) The Account is based on the system of a summary of the daily debits/credits generated for each branch (H.O.
Summary) which indicates the
- * Opening balance of Head Office, ) (* must agree with the Branch General
- the day's debits, ) Ledger Balance)
- the day's credits, and )
- * the closing balance, )
and these summaries are considered for centralized matching at the designated office
This exercise throws up unmatched entries which are communicated to branches as follow-up measure
for effecting reconciliation.
The terms "MATCHING" and "RECONCILIATION" must be understood.
d) At the Branch level, the auditor should ensure that if the system so requires, it should be ensured that such
Summaries are forwarded to the centralized office for matching and no such summaries are pending. This
can be done by a review of the file containing such summaries and correspondence from Head Office on the
subject. It is recommended that the review should cover a period of 6-8 weeks, including the last two weeks of
March.
The opening and closing balances as carried over in the summaries, must be checked with reference to the
balances in the ledger; and any unusual/large entries should be reviewed in depth. If the ledger balance
(H.O. Account) does not tally with the summary, it must be reported.
e) The provisioning requirements for old outstanding debits in Inter-branch accounts continue to apply and
need to be considered to ensure that net debits over 6 months as at 31.3.2018 are provided for without
setting off debits in one category against credits in another.

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NOTES AND INSTRUCTIONS – OTHER ASSETS: (Contd.)
3. Interest Accrued:
a) Under the above sub-head should be included:
- Interest accrued but not due on
. Investments
. Advances (including bills purchased and discounted)
- Interest due but not collected on investments
b) accounts and shown as part of 'Advances'.
c) Only such interest as is capable of being realised in the ordinary course, is expected to be recorded. This is in
conformity with the Accounting Standard, "AS-9-Revenue Recognition" as also with instructions given by
R.B.I. to the effect that interest be not recorded as income in respect of Non Performing Assets.
Interest accrued in the current year in respect of accounts identified as NPAs must be reversed to Income
and de-recognised and cannot be the subject matter of a provision. Income accrued for the earlier year
and remaining unrealised, can be provided for or derecognised.
d) Interest accrued on items other than Investments/Advances e.g. on items appearing as "Other Assets" cannot
be included under the above sub-head but under the sub-head ÒTHERS'.
4. Tax Paid in Advance/Tax deducted at source (TDS):

Normally this item is dealt with at Head office and does not appear in the Branch Balance sheet. Audit
procedure is, therefore, not being enumerated for this item.
If there is any TDS , the auditor needs to enquire as to the income to which this pertains so that the Bank
claims it in its assessments. If it is on account of payments that cannot be explained , this need a
provision.
5. Stationery and Stamps:
a) As per R.B.I. instructions, only exceptional items of stationery like bulk purchase of security paper, loose leaf
or other ledgers etc.(which would include bulk paper stocks) should be valued and considered. It is
recommended that this item should be treated as a "quasi-asset" to be written off over a period of time.
b) The valuation of items of bulk stationery is suggested to be at cost/estimated cost without any element
of escalation/appreciation.
c) The extent of write off and basis thereof would have to be determined as per the policy adopted by the Bank
Management. Instructions to the Branch in this regard from Head Office must be referred to.
d) In some banks there are separate Printing and Stationery Cells which look after bulk procurements, printing
of stationery and of its distribution. The branches usually do not stock large quantities. It is the intention to
cut down elaborate accounting procedures on an item which is not material. The banks, while adopting a
simplified procedure at the Head Office level, may still require the branches to prepare details of stocks and
carry out physical verification procedures, as a matter of moral check.
e) Receipts, custody and dual controls over security paper stationery and verification is imperative by
the Branch auditor, of stocks of such un-issued security paper comprising cheque books, DDs, TTs,
Gift cheques, Pay orders, Travelers' cheques etc.
Missing stationery of this nature may cause detriment/loss to the bank and must be reported.
Interest accrued and due on advances is normally expected to be debited to the borrowers'

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NOTES AND INSTRUCTIONS – OTHER ASSETS: (Contd.)
6. Non-banking assets acquired in satisfaction of claims:
Under this sub-head is included value of immovable properties/tangible assets acquired in satisfaction of claims.
The value should normally not exceed the estimated realisable value. Such an item may not exist in most of the
branches.
7. Others :
(Note: This sub-head would include outstanding entries in suspense and other similar nominal heads of account
and deserve special attention of the audit staff, particularly for old/unexplained/ large entries/
outstandings, a critical review of these must be made. RBI has also suggested a quick audit of entries in
Suspense Account and the status thereof to be reported in terms of its circulars dated
6.7.95/18.8.95 and reference may also to be made to the old RBI Circular
DBOD.BP.BC.4/21.04.018/2003-04 dated 19.7.03 (as regards reconciliation of Clearing Differences and
Sundry/Suspense Accounts); which circulars continue to apply.
a) The items that would be covered by this sub-head would include all residue items not covered by any
specific head. All nominal heads like 'Suspense', 'Sundry Assets' and with similar nomenclature are used
by banks to record transitory entries which cannot be adjusted to the respective heads/sub-heads for
want of particulars/details.
b) According to R.B.I., this sub-head will include

- items like claims which have not been met, for instance:
. clearing items(i.e., debit balances comprising clearing differences).
. debit items representing additions to assets or reduction in liabilities which have not been adjusted for
technical reasons/ want of particulars.
. advances given to staff like festival/drought relief/housing advances etc. due to the employer-
employee relationship where normally lien is marked on the terminal benefits of the employee; but
advances against FDRs and other securities etc. are also made.
While distinction needs to be made between advances given by the bank as an "employer" and as
"banker", the RBI's latest applicable circular needs to be kept in view as regards disclosure requirement
of advances in the latter category i.e. as banker. Interest bearing advances are otherwise to be
treated as advances.
- items in the nature of expenses which are pending adjustments. These should be provided for and
the provision netted against this item, so that only the realisable value is shown under this head.
( provisions against debits of expenditure nature would have to be considered here).
- accrued income, other than interest.

(This may imply inclusion of dividends on shares held as Investments in subsidiaries etc.,
which income falls in Schedule 14 of the prescribed form).
(Note : Staff Advances are to be treated as Standard/Performing Assets and interest accrued
thereon except in cases of Staff Suspension/dismissals etc. where there may be loss
of pay etc.)
c) Besides the above, items like the following may normally be included against this sub-head:
- Building under construction,
- Furniture, Fixtures and other fixed assets pending capitalisation,
- Advances to staff pending adjustments either against provisions made at Head Office (e.g. bonus
payments), or other advances towards expenditure to be adjusted pending
submission/clearance/sanction of claims (e.g. travel advance, L.T.C. advance etc.),
-Security Deposits (for electricity, telephones, tenanted premises etc. and advance rent/lease money) etc.
- Prepaid Discount on Bills Rediscounted.

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NOTES AND INSTRUCTIONS - CONTINGENT LIABILITIES:
I. Claims against the Bank not acknowledged as debts.
II. Liability for partly paid investments.
III. Liability on account of forward exchange contracts.
IV. Guarantees given on behalf of constituents:

a) In India
b) Outside India
V. Acceptances, endorsements and other obligations.

VI. Other items for which the bank is contingently liable.
2. Claims against the Bank not acknowledged as debts:

a) Against the above sub-head, would be included the amount comprising claims made by staff(under
suspension/dismissal), constituents (e.g. for dishonour of cheques, frauds in
customers' accounts due to negligence etc.) and any other matters in litigation which are contested by the
bank and not acknowledged as a liability. Such claims may arise from Govt. bodies/authorities/others either
under statute or through litigation/arbitration etc.
b) If would be advisable to obtain an updated list of claims including those in the post-audit period upto the time
the audit is finalised, to account for such claims which relate upto the year-end.
c) Claims outstanding as at the previous year-end, if deleted should be enquired into, to be certain that these
have not been deleted by mistake.
3. Liability for partly paid investments:

This would usually be worked out by the Investment Department at Head office, and normally no figure should
appear in the Branch returns, unless the value of investments is decentralised at some branches.
4. Guarantees given on behalf of Constituents/ Letters of Comfort and Letters of undertaking:

{Reference must be made to the RBI Master Circular on Guarantees and Co-acceptances
(DBR.No.Dir.BC.11/13.03.00/2015-16 dated 1-7-2015)} - Also refer to the LFAR requirements.
a) Guarantees are issued on behalf of customers as part of the agency functions of the bank, and for which the
bank charges commission. There is no outlay of the bank's funds till a claim arises from any
claimant/beneficiary in whose favour guarantee is issued.
b) Guarantees issued may be specific to particular transactions or a series of transactions involving assumption
of obligations upto certain monetary limits. Guarantees are issued for certain specified time limits and have a
claim obligation, unless the guarantee is renewed.
Such obligations are assumed by issuance of a guarantee document normally signed by the authorised
signatories; and the bank normally obtains as a security, either a cash margin based on a percentage
of the obligation or holds fixed deposits and in some cases, marks a lien on the account of the customer.
It also obtains counter-guarantee to be invoked in case the obligation devolves.
c) Entries are imperative in the guarantee register for each guarantee issued. The entries are expected to be
reversed upon expiry of the guarantee/claim period, though in practice the bankers wait even for
return to it, of the relevant documents, out of abundant caution. The auditor must report expired
guarantees where the claim period has also expired and the financial obligations have ceased, which
continue to be included as part of the contingent liability.
d) Guarantees are expected to be issued only on security paper stationery under dual control.
It is imperative that internal control for recording of guarantees is looked into to ensure that entries are made
immediately upon assumption of guarantee obligations.
e) Letters of comfort (LOCs), involving liability assumed must be treated as akin to guarantees issued.
f) Obligations comprising Letters of Undertaking (LOUs), normally used for trade credits, are disclosed in
the Notes in the manner required (by RBI), in foreign currency and Rupee equivalent, that should be at
the year-end rates of exchange.

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NOTES AND INSTRUCTIONS - CONTINGENT LIABILITIES: (Contd.)
5. Acceptances, endorsements and other obligations:

a) This item which used to be shown as 'contra' in the earlier form, has now become an off- balance sheet item
under the above sub-head and would include:
- Letters of credit opened by the bank on behalf of its customers,
- Bills drawn by the customers and accepted or endorsed by the bank to provide security to the payees.
b) Letters of credit are documents under which the bank agrees to meet the obligations of
its customers (usually for purchases/imports).
Letters of credit are normally issued on certain terms, conditions and stipulations, against guarantees of the
customers and may be with/without security/margin. Upon honouring the commitment and making
payment to the other bank/party, the amount is debited to the bank's customer and treated as an
advance; and the margin/security is adjusted depending upon the conditions of the L.C.
The Bank may retain as a percentage of the value of the L.C., a cash margin or take Term Deposit
Receipt(s) or mark a lien on the account of the customers , to enable it to
appropriate such credits in the event of a default by the customer in not honouring its
commitment to the bank.
- Such Letters of credit may be:

. clean,
. documentary - where bills drawn are accompanied by documents of title to goods
. revocable - entirely at the pleasure of the bank at any time prior to shipment of goods
. irrevocable or confirmed
. for single transaction or bill- covering purchases/ imports,
. "revolving" to cover a series of transactions within certain limits/value, sometimes restrictions being
placed on limit of each bill.
6. a) Obligations assumed in foreign currency:

It is the practice of some banks to record the Rupee equivalent of the contingent liability on the date of
assumption of the liability in case these are in foreign currency. Such a liability needs to be expressed
in Rupees, converted at the year-end rates.
b) Common errors:
The common mistakes made by Branches are
. not to take the correct totals of the liability recorded in various registers,
. not to remove liabilities which have lapsed/cleared, and
. not taking action in case of defaults.
In some cases, the relevant columns in the Balance Sheet formats are not disclosed.
These need to be reported.
7. Distinction between LOCs and Letter of undertaking(LOU) must be understood (refer Annexure `R’),
particularly in cases involving Buyers/Suppliers/Trade Credits. RBI accepts that both involve a
`Contingent Liability’ to be disclosed in the Notes on Accounts. Audit procedures warrant the details of
the outstanding LOCs and LOUs being verified and in respect of foreign exchange exposures, to ensure
that correct year end rates applied. Branch maintaining NOSTRO Accounts must ensure incorporation of
the related receipts/outflows from/to other banks overseas.
The outstanding entiries must be examined to determine whether these comprise any funded exposures
by or on behalf of the bank, particularly if these are to overseas banks/associates/branches in foreign
currencies, to fund suppliers in respect of purchases made by the bank’s borrowers under Trade
(Suppliers’) Credit arrangements.
8. Other Items for which the bank is contingently liable:

This would include all residue contingent liabilities not covered under any other sub-head and as per R.B.I.
instructions, includes:
. arrears of cumulative dividends (in case of companies),
. bills of exchange rediscounted, which must not include matured bills.
. commitments under underwriting contracts,
.*estimated amount of contracts remaining to be executed on capital account and not provided for.
(*this item cannot really be considered as a contingent liability, but RBI instructions require Banks to
include this item under the above head.)

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NOTES AND INSTRUCTIONS - BILLS FOR COLLECTION:
1. Bills for collection
a) do not involve an outlay of the Bank's funds as this stems from the agency function of banks. The banks
earn commission for rendering service relating to collection of bills for their customers. Bills not collected
are, therefore, normally returned to the customers, and by and large only current outstanding bills should
figure in the accounts of the branch. Old entries should provoke enquiries.
b) could be of the nature of clean D.D.s., Documentary demand/Usance Bills or cheques; and INWARD
BILLS would be from branches or others and OUTWARD ones to branches or others.
Internal entries inter-se the branches covering bills for collection are to be excluded in the figure to be
disclosed against the above head by the Bank.
2. Normally detailed records are maintained for bills received or sent for collection, including particulars in dispatch
registers, acknowledgements etc. which may provide information as to whether or not these have been
expeditiously forwarded as per instructions relating to collection of the bills.
3. Bills in hand should be physically verified on the date of the first visit as also by surprise check on any
subsequent date; and it should be ensured that the bills held, tally with the entries in the relevant register(s)
maintained. In the case of documentary bills it should be ensured that the related R.R.s./ T.R.s. are held
along with the Invoices/Hundies/Bills and that these have not been parted with. Whenever such R.R.s./
T.R.s. are not held on record, the fact should be reported, giving details.
4. It is imperative that bills expressed in foreign currencies are properly converted at year-end rates of
exchange advised by H.O./controlling authority.
5. The auditor should enquire whether there are any claims against the Bank on account of bills which may
have been lost in transit involving the bank in any proceedings/claims or possible liability.
To avoid risks of this nature, the Bank's procedure may involve obtaining from the drawers(customers), a
letter of undertaking to indemnify the bank against risks involved in collection of bills. In the event of a
detriment/loss caused, the banks are also normally covered by the "Bankers' blanket insurance policy".
6. Since this is an off-Balance sheet item, the branch managements have a tendency to be casual and
ignore casting errors and omissions in the matter of recording bills as also the fact that they do not follow up old
entries to square up the items..
7. Reasons for old unadjusted entries need to be enquired into and reported in the LFAR.

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PROFIT AND LOSS ACCOUNT
NOTES AND INSTRUCTIONS - INTEREST EARNED:
I. Interest/discount on advances/bills
II. Income on investments
III. Interest on balances with Reserve Banks of India and other inter-bank funds
IV. Others
General Principle (Income Recognition):
Income can generally be recognised only on assets that are considered performing,
Income on Non Performing Assets (NPA) cannot be accrued at contractual rates and must not be recorded as
income except on actual realisation. In case of accounts identified as Non performing, the amount of charges
and interest accrued, but not realized, including for past periods is derecognized/provided for and after te date of
the NPA status attaching to the accounts, no further interest is applied. The amount of contractual charges and
interest due but no realized in such accounts is recorded in Interest Suspense or similar account and that
unapplied to the account of the party, is recorded in the Memorandum account.
Interest on NPA if recorded, will be reported by the auditors unless the same is on the basis of
realisation.
2. Interest/discount on advances/bills:
a) With intentions of more disclosure, the break-up of income "earned" is required in the Profit and Loss
Account of Banks; and under the above sub-head the banks would be required to disclose earnings by
way of:
-interest on Term/Demand loans; and
-discount on bills purchased and discounted.
i.e. income in respect of the Advances portfolio of the bank is to be shown against this sub-head.
b) At the Branch level, the income by way of interest and discount charges is expected to be
disclosed, net of reversals required to derecognize income on NPAs. Interest (discount) component
paid on rediscount of bills, is not to be netted off from the discount earned on bills discounted.
c) Advances to customers are expected to be disclosed by the banks, net of moneys received by way of
participation (on risk-sharing basis). Correspondingly, the interest paid on such participation can
logically be reduced from the income earned - as the real earning of the bank would be the net
figure (being the interest differential between that charged from the borrower and the
participating bank/institution).
d) Overdue interest and interest subsidy earned upto the year-end in respect of advances has to be included
under the above head.
e) On all loans the contracted rate is applicable throughout, whether fixed or floating, and interest
rates for the time being in force are to be applied; and the auditor is expected to ascertain the rates
applicable and changes therein during the year under audit.
f) Unapplied interest on NPAs (except those in litigation) must be computed at contracted rates.
g) Vide Master Circular DBR.No.Dir.BC.9/13.03.00/2015-16 dated 1-7-2015, RBI has consolidated and updated
its directives on interest rates on advances; and all categories of domestic rupee loans should be priced only
with reference to the Base Rate System. Banks should have a Board approved policy to approve Base Rate
that includes all those elements of the lending rates that are common across all categories of borrowers.
There can be only one Base Rate for each bank, requiring quarterly review based on cost of funds ,
computed on average / marginal cost of funds or any other methodology in vogue, which is reasonable and
transparent provided it is consistent and made available for supervisory review/scrutiny. There is exemption
to certain categories of advances.
Exemption: DRI advances, loans to banks’ own employees including retired employees, loans to banks’
depositors against their own deposits, Interest Rate Subvention on Crop Loans/Export Credit, could be
priced without reference to the base rate. In case of restructured loans if some of the WCTL, FITL, etc. need
to be granted below the Base Rate for the purposes of viability and there are recompense etc. clauses, such
lending will not be construed a violation of the Base Rate guidelines.
With effect from1-4-2002 , Interest is required to be charged at Monthly Rests, except in agricultural
advances and banks should continue the existing practice of charging / compounding of interest on such
advances linked to crop seasons. (Refer RPCD.No.PLFS.BC.129/05.02.27/97-98 dated June 29, 1998,
where banks need to charge interest on advances for long duration crops at annual rests. As regards other
agricultural advances in respect of short duration crop and allied agricultural activities such as dairy, fishery,
piggery, poultry, bee-keeping, etc., due dates need to be fixed on the basis of fluidity with borrowers and
harvesting / marketing season while charging interest and compounding the same if the loan / installment
becomes overdue.
In a system driven application of interest on advances, if it is observed that debits for interest charged
appear in the accounts of the customers on a date prior to the month /year end, it cannot be
presumed that interest has been actually computed till the month/year end, as further transactions
have not been considered. Any shortfall in computation of interest between the date of application
and the year end needs to be provided.

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XXIX
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NOTES AND INSTRUCTIONS - INTEREST EARNED: (Contd.)
3 Income on Investments:
This does not include dividends on shares held in the bank’s name by way of pledge in advances
account of borrowers
Normally this is on centralized basis and audit procedures are not being enumerated in the Branch audit
programme. Income, if any, collected by the branch on investments held on behalf of the Head
Office/Investment Department, is expected to be recorded only at Head Office.
In case any income on investments is recorded at the Branch level, it may be vouched with reference to the
authority/instructions of Head Office.
a) As per R.B.I. instructions, income derived from the investment portfolio by way of:
-interest ; and
-dividend,
has to be included under the above sub-head.
b) It will be observed from the prescribed form, that "income earned by way of dividends from subsidiaries/and/or
joint ventures abroad/in India" is to be shown in a separate schedule under the head "OTHER
INCOME". Such income will therefore, not be treated as from the "investment portfolio" although
investments in subsidiaries etc. are treated/disclosed under the head "INVESTMENTS".
4. Interest on balances with Reserve Bank of India and other inter-bank funds:
a) Included under the above sub-head would be interest on:
- balances maintained with R.B.I.,
- money market placements (including money at call and short notice), and
- call loans/deposits with banks,
b) In most cases, it is the Head Office (normally through its Investment/Treasury Department) that monitors
money market placements and balances with R.B.I. and accordingly, in the branch returns, no such
income should normally appear. In designated branches where Head office/ controlling authority may
have permitted the operation of such accounts, the authority of the Head Office/controlling authority to
transact such business would have to be examined; and the income required to be recorded at the branch be
vouched accordingly.
5. Others:
a) Interest/discount other than that recorded under the other sub-heads, would have to be shown in this
residue sub- head.
b) Under this sub-head would be included interest on items like:
- staff advances (given by the bank as an employer/banker)
- security deposits for rented/leased premises/Electricity etc. and on advances/deposits for booking
assets where, as per terms and conditions applicable, interest is recoverable, i.e. on
assets recorded under the head "OTHER ASSETS" in the Balance Sheet.
c) Interest on Inter-branch Account must be examined with reference to relevant HO advices. The profit /loss
of the branch is inclusive of such transfer pricing entries.

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NOTES AND INSTRUCTIONS - OTHER INCOME:
1. Legal requirements of Disclosure:
I. Commission, exchange and Brokerage
II. Profit on sale of investments
Less: Loss on sale of investments
III. Profit on revaluation of investments
Less: Loss on revaluation of investments
IV. Profit on sale of land, building and other assets
Less: Loss on sale of land, building and other assets
V. Profit on exchange transactions
Less: Loss on exchange transactions
VI. Income earned by way of dividends from subsidiaries/companies and/or joint ventures abroad/in India.
VII. Miscellaneous Income
(Under items II to V loss figures may be shown in brackets).
2. Commission, exchange and brokerage:
a) Under the above sub-head, is to be included earnings on services rendered, such as:
Commission:
- on collections,
- or exchange on remittances and transfers,
- on letters of credit/ guarantees,
- on Govt. business,
- on other permitted agency business (including consultancy and other services),
- letting out of lockers, and
- brokerage etc. on securities.
b) Foreign exchange income is not to be included here, as the same is required to be separately disclosed.
c) Brokerage and commission in connection with Merchant banking activities is also required to be
considered under this sub-head unless it is received on underwriting obligations on devolved liability;
in which case, the investments would be shown at net of the brokerage/ commission attributable to
such devolvement.
3. Profit on sale of Investments (less Loss):
a) Only the net position of profit/loss on sale of investments has to be disclosed by the Banks in their annual
accounts. Since in most banks, the investment portfolio is centralised, no figures on this account would
appear in the branch returns; and the audit procedures are, accordingly, not being enumerated.
b) In case the Branch returns include such figure, ascertain basis thereof and vouch the transactions, in the light
of authority from the Head office/controlling authority - after examining the system/ basis of accounting
for profit/loss on disposal of investments.
4. Profit on revaluation of investments (less Loss):
Since the matter is dealt with at Head Office, the audit procedures are not being enumerated.
5. Profit on sale of land, buildings and other assets (less Loss):
a) Besides Profit/Loss (net) on sale of fixed and other assets, the net profit/loss on revaluation of such
assets is also required to be shown here.
b) As regards surplus on revaluation, reference may again be made to the disclosure requirements under the
head "RESERVES AND SURPLUS - Capital Reserves".
c) Other assets would include Non-banking assets acquired in satisfaction of claims.
6. Profit on Exchange transactions (less Loss):
a) The net figure would have to be shown under the above sub-head; and the transactions
would include:
- Profit/loss on dealing in foreign exchange,
- commission earned by way of foreign exchange,
- commission and charges on foreign exchange transactions,
excluding interest.
b) The figures would appear at branches which have foreign exchange dealings or are
authorised dealers in foreign exchange.
7. Income earned by way of dividends from subsidiaries/ companies and/or joint ventures abroad/ in India:
This would appear only at the Head office/ investments Department of the Bank
8. Miscellaneous Income:
Under the above sub-head would be included:
- godown rent recoveries from customers,
- income from bank's properties (other then locker rents),
- safe custody charges
- security recoveries, and
- any other miscellaneous income.

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XXXII
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PROFIT AND LOSS ACCOUNT:
NOTES AND INSTRUCTIONS - INTEREST EXPENDED:
I. Interest on deposits
II. Interest on Reserve Bank of India/inter-bank borrowings
III. Others
2. Interest on deposits:
a) It is necessary to ascertain for the year under audit, the rates, and terms and conditions on which deposits
are accepted, so that the calculations and interest application is correctly accounted by the branch, and
tested in the course of audit. The relevant circulars from the Head Office/ controlling authority need to be
examined to report deviations, if any, therefrom.
b) The auditor should ascertain the method followed for recording interest in the deposit accounts at
the Branch as well as for accrual of liability upto the year-end.
Where requests are made to pay interest on deposits by means of Pay Orders/Bankers Cheques,
care may be taken to ensure that in respect of such deposit, provision/accrual is not again made
or credit afforded again to the depositor.
c) Interest payment in special cases:

No interest can normally be paid on Current Account or certain other type of balances. At present interest can,
however, be paid:
On Current Accounts:
- to Regional Rural Banks sponsored by the Bank - at the rates as mutually agreed, and encouraged not
to pay interest to RRBs on balances maintained with the Bank
- to claimants/legal heirs/nominees in case of deceased depositors, sole proprietorship concerns as per
Para 3.18 of the Master Circular - interest to be paid only with effect from 1-5-1983, or from the date of
the death whichever is later : at the rate applicable to Savings Bank Accounts on the date of payment;
(incase of NRE Deposit where the claimants are resident, the deposit on maturity is to be treated as a
domestic deposit, interest is to be paid for the subsequent period at a rate applicable to domestic deposit
of a similar maturity; and
d) On Term Deposits (other than FCNR(B)- where the depositor dies:
Bank is required to lay down a transparent policy as per Para 3.18 of the Master Circular referred to above.
e) If a Fixed Deposit Receipt matures and proceeds are unpaid, the amount left unclaimed with the bank will
attract savings bank rate of interest (Para 3.4 of Master Circular for Re. deposits).
f) Review may be made of credits in Interest Expended Accounts to determine nature thereof and to
ensure that credits are appropriate and do not relate to income heads.
3. Interest on Reserve Bank of India/inter-bank borrowings:

This item would not normally be dealt with at the Branch.
In case there are borrowings recorded at the branch, the basis and terms of interest application must be seen
and the entries vouched in toto.
4. Others:
a) Included under the above residue sub-head, would be payments like:
- Interest/discount on borrowings/refinance from financial institutions,
- interest on participation certificates (on non-risk sharing basis),
- penal interest, etc.
b) It is only at designated branches/offices that this would be recorded.
5. Interest paid to Head Office:
This items, if appearing in the Branch returns, is an internal adjustment (inter-se the branches) and has no
effect on the revenue of the Bank. If recorded, this will be checked on the basis of the relevant advice(s) from the
Head Office.

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XXXIV
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NOTES AND INSTRUCTIONS - OPERATING EXPENSES:
I. Payments to and provisions for employees
II. Rent, taxes and lighting
III. Printing and stationery
IV. Advertisement and publicity
V. Depreciation on bank's property
VI. Directors' fees, allowances and expenses
VII. Auditors' fees and expenses (including branch auditors' fees and expenses)
VIII. Law Charges
IX. Postages, Telegrams, Telephones, etc.
X. Repairs and maintenance
XI. Insurance
XII. Other expenditure
-------------------------------------------------------------------------------------------------
PROVISIONS AND CONTINGENCIES
2. Payments to and provisions for employees:
a) Under this sub-head would be included:
- staff salaries/wages,
- allowances (including house rent allowance),
- bonus,
- gratuity,
- pension,
- provident fund,
- liveries to staff,
- leave fare concession,
- staff welfare, medical allowances etc.
b) There is no requirement to separately disclose managerial remuneration, which may get covered otherwise
through AS 18 - Related Parties.
3. Rent, taxes and lighting:

It would be advisable to go through the terms and conditions relating to the tenanted premises; to ensure that
adjustments are as per the current obligations as per the tenancy arrangements. Also enquire whether there are
any pending disputes as regards Rent enhancements, Municipal dues or electricity bills etc., that require
adjustments or disclosure of any contingent liability.
4. Printing and stationery:

Ascertain the system followed for charging off expenditure under the above sub-head with reference to H.O
instructions. For the Bank, the bulk purchases of stationery, are to be treated as a quasi-asset to be written
off over a period of time. The policy in this regard may be enquired into.
5. Depreciation on Banks Property:

It would be advisable to understand the system adopted to adjust depreciation on fixed assets; and follow
the H.O. instructions.
6. Repairs and Maintenance:

Scrutiny should be made of this account to determine whether any item requiring capitalisation has been charged
off, particularly in Branch renovation expenditure.
7. Other Expenditure:
Scrutiny should be made of the various major account heads included in this-particularly Travel expenses and
any unusual expenditure may be vouched.
8. Other Provisions:
While reporting, it is necessary to determine as to the items of expenditure that are usually provided or adjusted
at Head Office and make reference thereto in the report.
Items usually omitted to be recorded is the provision for rent, professional charges, concurrent auditor’s fee and
payments for Security and Maintenance service contracts (which must be net of TDS as applicable). Such
expenditure should be provided for.

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NOTES AND INSTRUCTIONS - GENERAL:
1. The audit procedure outlined under the head 'GENERAL' is recommended to be covered, and would give an
idea as to the general housekeeping of records. Review of routine transactions for one day is
recommended for the reason that one would become broadly familiar with:
- the nature and flow of transactions;
- the manner of recording these;
- the terminologies used;
- internal control procedures.
2. It is recommended that suitable letters may be addressed to the Branch Management seeking information which
is relevant to expediting the audit procedures and to seek confirmations as regards certain matters. Refer
Sections A and B
It is imperative to obtain responses to each item in writing.
3. The audit file must be properly maintained to adequately document the notes/observations/working
papers/certificates etc. in evidence of work done, and to be the basis of the reports submitted. Linkage must
be provided in the documentation file to determine the beginning and end of the audit verification
procedures
4. The notes/observations taken head-wise, should be segregated to be incorporated into the relevant reports to
be submitted. It is important to note that the Long Form Audit Report (to the Management) is not a
substitute for the main audit Report to be furnished by the Branch Auditor to the Central Statutory
Auditor.
Items having a material financial effect on the accounts and those covered by the statutory
responsibilities of the auditor must be considered in the main report; and such reports must be in
clear, unambiguous language with quantification of all modifications to the report required as per the
SA 700 (qualifications, adverse remarks, disclaimers) unless the quantification is not possible, in which
case the nature of the adverse features need to be given.
For text of the Main audit reports and the manner of reporting, reference may be made to Section D
Reference may also be made to the reporting requirements of the LFAR

The primary responsibility for response to the questionnaire is that of the Branch management; and
the auditor is expected to verify the information furnished and express his opinion thereon.
5. The figures in the Branch returns once finalised and communicated to Head office, are not changed. The
branch auditor may only report any changes that he wishes, based on his audit observations, through
the Memorandum of changes (MOCs), which will from part of his report.
6. In respect of frauds reported/recorded at the branch, it would be advisable to study the modus operandi
and adopt extended tests and in depth checking in areas which appear to be more risk prone at the
branch.The auditor may extend his audit procedures only if he has reasons to believe that a fraud has been
perpetrated , keeping in view the audit objectives.
7. Averages based on month-end figures of deposits, borrowings and of advances may suffice for working out
the trends of interest earned/expended; and to determine divergent trends, if any.

BANK AUDIT 2017-18 C1
SELECTION OF ADVANCES FOR AUDIT VERIFICATION
Basis of selection of Advances accounts to be examined by Branch Auditor No. of Accounts
1. All Large accounts (as defined- Rs. 2.00 crores or 5% of the Portfolio, whichever
is less) -per Annexure III- Section A
2. Cases under consideration of Joint Lenders Forum (JLF).
3. NPA accounts upgraded to Standard during the year
4. Advances where Restructuring Proposals/ requests are pending
approval/disposal at year end.
5. Accounts Restructured in the earlier years to determine their year-end status, if
in default or not classified as per RBI norms
6. Cases where one time settlement (OTS) has been sought.
7. Accounts Restructured during the year to determine their year-end classification.
8. Accounts in which OTS was accepted but there is default in compliance.
9. Restructured advances with moratorium of Interest where interest is accrued
contrary to RBI applicable norms
10. FITL cases arising out of Restructuring where corresponding provisions are held
in “Sundry Liabilities Account (Interest Capitalization)”.
11. Advances accounts where there is an initiation of proceedings involving
Investigation, vigilance, enquiry and those where fraud is reported.
12. Staff Advances – where the persons have ceased to be employees of the Bank;
and accounts in default.
13. BIFR cases classified as Standard.
14. SSI/SME cases under rehabilitation as at the year end
15. Standard advances in litigation
16. Central Government guaranteed cases which are Standard non-performing.
17. Standard accounts where there is Interest Suspense/ Unapplied Interest.
18. Advances in the list of willful defaulters of the RBI.
19. Advances subject to re-financing.
20. Cases of Flexible Structuring of Long Term Project Loans to Infrastructure and
Core Industries – Loans sanctioned after July 15, 2015.
21. Cases of Flexible Structuring of Long Term Project Loans to Infrastructure and
Core Industries - Loans sanctioned before July 15, 2015.
22. Fresh NPAs identified by the Branch.
23. NPA cases where the assessed realizable value of the securities has a
significant shortfall – 50% or more.
24. NPA cases where the realizable value of the security as assessed by the
Bank/approved valuers /RBI is less than 10% of the outstanding.
25. Standard Accounts with temporary deficiencies per Para 4.2.4 of Master
Circular on Advances
26. Quick Mortality Cases

27. Advances comprising frauds detected (Para 4.2.9.(ii) of the IRAC Master
Circular dated 1.7.2015)
28. MSME Borrowers registered under the GST Regime having an exposure in
aggregate (including non-fund based) up to Rs. 25 Crore.
29. Other Accounts, not covered above, with adverse comments in the
existing/latest Reports (as per Para 1 of Annexure I to the initial letter to
Branch)
36
Bakaud18.sanjay v & mmk

C
BANK AUDIT 2017-18
ANNEXURE C II : COMMON IRREGULARITIES/ ADVERSE FEATURES IN ADVANCES ACCOUNTS
(Illustrative)
Code Nature of Irregularities/ Adverse features
1. CREDIT APPRAISAL:
1.1 Loan application form not obtained / not on record.

1.2 Loan application not complete in all respects or not signed.
1.3 Borrower’s name, whether figuring in the list of willful defaulters of RBI not checked/ indicated
(Refer RBI Master Circular DBR.No.CID.BC.22/20.16.003/2015-16 dated 1-7-2015).
1.4 Information not given as regards borrower being a Director of the Bank/another bank or of being
an officer or a relative of any Director/ officer of the Bank.
1.5 Credit appraisal made for borrowers:
a) in the “negative” list of the bank.
b) where the borrower is a defaulter/willful defaulter/NPA with other banks/ institutions.
1.6 All documents / annexures required with the application form not received by the Bank,
including:
1.6.1 Documents evidencing nature / type and legal status of entity such as Memorandum & Articles
of Association, Partnership Deed, Trust Deed etc. (not received/called for).
1.6.2 Latest financials (duly audited) and / or updated unaudited financials not obtained and / or not
reviewed (including in particular the Notes on Accounts, off balance sheet disclosures and the
report of the auditors on the accounts where audit is required/done);
1.6.3 Audited statements if received are incomplete – without Accounting Polices / Notes / Audit
Report.
1.6.4 Half yearly/quarterly review reports (listed entities), not received/reviewed.
1.6.5 Cost / secretarial audit, if required, not got done, or no report thereof available.
1.6.6 Credit report not obtained from previous bankers / existing bankers from whom account is being
shifted, and reasons for such shifting not justified.
1.6.7 Credit Reports of borrower/guarantor not obtained, or are inadequate, as regards material
particulars
1.6.8 Evidence on certain matters included in financial statements/financial status not
obtained/reviewed (e.g., copies of Vat/Sales tax/ Income tax/Wealth tax returns/orders,
contingent obligations).
1.6.9 Credit reports of borrowers/guarantors, not reviewed, or latest ones not obtained
1.6.10 Adverse features reported upon in Inspection / audit not considered in appraisal in respect of
continuing advances / for enhancement in limits. (eg. off balance sheet exposures, dealings with
other bankers, major variations between audited data and QIS to branch).
1.7 Techno-economic feasibility report not obtained.
1.8. Industry / group exposure and experience of the Bank not dealt in the appraisal note.
1.9. Bank’s policy norms for inventory/book-debts/creditors levels not followed as stipulated by the
management.
1.10. Adverse features observed in reports of concurrent Auditors/ Statutory Auditors/ RBI
Inspection/LFAR not incorporated in the appraisal note, as arising from:
a) RBI Inspection/
b) Concurrent Audit
c) Inspection Audit
d) Internal Audit
e) Statutory Audit/LFAR
f) Stock Audit
g) Special Audit/Credit Audit
h) IT/EDP/Systems Audit
1.11 Explanations not called for, or not justified, in respect of major variations between projected and
actual financial data furnished.
1.12 Credit rating form not attached with credit appraisal note, or if attached, not reviewed.
1.13 Opinion reports of the associate and / or sister concerns of the borrower not called.
1.14 Appraisal of fresh limits made to cure existing defaults in NPA accounts.
1.15 Frequent resorting to short review procedures rather than full review of borrowal account.
1.16 Bank’s rights to recompense not considered in appraisal where recoveries of earlier sacrifice
are being made.
1.17 General level of compliance in the past not indicated.
1.18 Diversion of funds for purposes other than those intended, in the past not considered (including
working capital funds being used for long term deployment).
37
C
BANK AUDIT 2017-18
(Illustrative)
2. SANCTIONING AND DISBURSEMENT:
2.1 Proposals sanctioned without the approval of the higher authority / signature of the concerned
authority.
2.2 Facilities disbursed before the completion of documentation and other sanction terms.
2.3. Adhoc limits granted pending completion of appraisal/sanction of regular limits.
2.4. Disbursement made without following procedures relating to confirmation of higher authority as
regards completion of formalities.
2.5. Sanctions in excess of delegated authority.
3. DOCUMENTATION:
3.1 Documents on record are blank, all parts not filled up and / or without signatures of Branch
Manager and witnesses.
3.2 Documents signed by persons other than those authorised.
3.3 Inappropriate set of documents having no nexus to the status of the borrower or with the type
of facility
3.4 Signatures of the executants on all the pages of the documents not found and not obtained on
all corrections / endorsements in the documents.
3.5 Documents have become mutilated / soiled, or have expired and the bank is exposed to the
risk of not enforcing the security.
3.6 Consortium advances – documents not yet executed or not on record.
3.7 Consent from other lenders for creation of security, not on record.
3.8 Guarantee papers not on record / not renewed.
3.9 Revival letters not received.
3.10 Certification of Registration of charges with ROC / or evidence thereof not on record, in case
of companies.
3.11 LIC Policies (together with evidence of surrender value), not obtained or not on
record.
3.12 Bank’s FDRs (lien marked) not obtained or not on record, where FDRs are security
3.13 KVPs not obtained or not on record.
3.14 IVPs not obtained or not on record.
3.15 Second charge on assets, as per terms of sanction, not created in favour of the bank.
3.16 Under-stamping of documents, and Stamping not as per the latest Stamps Act (particularly for
immovable properties)
3.17 Completion certificate, sale deeds, share certificates in societies, etc. not on record for
housing loans.
3.18 Original Staff and other Housing loan documents not on record at the Branch.
3.19 Sales / search report / Title Clearance Report from advocate in respect of immovable property
not obtained or on record.
3.20 Mortgage for property not created, as required.
3.21 Clearance not obtained from Authorities concerned to permit mortgage.
3.22 Copies evidencing lodgment of the original conveyance / sale deeds with the sub-Registrars for
registration, not on record.
3.23 Authority letter / Power of Attorney to the Bank to collect the original documents from the Sub-
Registrar, not on record.
3.24 Loans granted on properties on the basis of Power of Attorney and not ownership.
3.25 Valuer’s report in evidence of gold / gold ornaments not obtained.
3.26 Registration certificates, transfer certificate, driving license, duplicate keys of vehicle and
insurance covers not obtained, in case of loans against vehicles.
3.27 “Nil Encumbrance Certificate/s “or “No Dues Certificate/s” or “No lien Letters” not on record.
3.28 Consent letter not obtained from borrower that the Bank would publish his name in the list of
defaulters, in the event of wilful default in repayment of the Bank’s dues.
3.29 Clause/ stipulation as regards interest rates variations to be as per RBI norms, not notified or
on record.
3.30 Other documents stipulated as per sanction not on record (specify).
38
C
BANK AUDIT 2017-18
(Illustrative)
4. REVIEW / MONITORING / SUPERVISION :
4.1 Non compliance of major / repeated adverse features in Audit reports / inspection in relation to
borrowal accounts.
4.2 Stock, book-debts statements / financial statements / other operational data etc., not received
regularly, or belatedly received from the borrower.
4.3 Stock Audit not got conducted and / or latest report not on record.
4.4 Major discrepancies / variations in the stock and other securities (between the annual audited
financial statements / stock audit report and the financial data / returns to the Branch).
4.5 Non-movement of goods in pledge accounts (particularly perishable goods) and accumulation
of old stocks.
4.6 Drawing Power not properly worked out, based on non deduction of:
a) Non-moving/old /unsaleable /ineligible stock,
b) unpaid for stocks,
c) old /ineligible book debts, and
d) margins as stipulated.
4.7 Physical verification of securities not done at periodic intervals, and action not taken on major
adverse observations based on Inspection reports.
4.8 Frequent requests for ratification of transgressions.

4.9 Statutory Liabilities not being paid, or being belatedly discharged, with constant fall back on
the bank.
4.10 Age-wise break-up of debtors not on record.

4.11 Penal interest not charged for delay in submission of various statements.
4.12 Drawing power / limits not updated / revised, as per market value of securities where advances
are against shares / securities.
4.13 End use of funds not ensured; and diversion if observed, not attended to.
4.14 Account is frequently / continuously overdrawn.
4.15 Frequently invoked LCs / guarantees
4.16 Actual performance is well below projections.
4.17 Sale proceeds not routed through Bank and credit summations are on the decline.
4.18 Audited statements of non-corporate borrower having limit beyond Rs. 10 lacs not received
(including Notes on accounts, accounting policies and Auditors Reports).
4.19 Renewal proposals of advances are not received on time and/ or limits not renewed / reviewed
within the stipulated norms (180 days).
4.20 Balance confirmation and acknowledgment of debt not obtained.
4.21 Life Policies taken as primary / collateral not sent for assignment in favour of the bank.
4.22 Insurance cover is inadequate, policies not on record / not renewed / not endorsed in favour of
the Bank.
4.23 Tendencies of expired bills / foreign currency sight bills becoming overdue frequently and not
getting crystallised when due.
4.24 Frequent cancellation of bills and substitution of unpaid bills.
4.25 Confirmation as to genuineness of export transactions not obtained from Bank’s foreign offices
/ correspondents / customs department.
4.26 For import credit, Bill of Entry evidencing import of goods not available.
4.27 Documents not obtained for bills discounted under Letters of Credit.
4.28 Advances requiring guarantee cover of ECGC not brought under its cover.
4.29 Guarantee not invoked although accounts are irregular and called back.
4.30 For allocated limits, full terms of sanction, stock statements, inspection reports, margin etc, not
available or available with considerable delay at monitoring branches.
39
C
BANK AUDIT 2017-18
(Illustrative)
4.31 In respect of Consortium arrangements (particularly where others are categorising the borrower
as NPA)
a) Regular meetings not held with other consortium members to review / assess
performance of borrowers.
b) Members of the consortium not advised about the quarterly operating limits / D. P.
c) Minutes of the consortium meetings not found on record.
d) Inspection reports from the consortium member not obtained.
4.32 Capital of the borrower has eroded / net worth is negative / decreasing.
4.33 Cases where adhoc limit remained unadjusted more than 3 months after due dates.
4.34 Copies of invoices and other evidence in relation to purchase of assets financed by the bank
not available for verification.
4.35 Application of wrong rate of interest, processing charges, commission, other charges, etc. (e.g.
due to wrong credit rating / non-revision thereof from effective dates).
4.36 Account becoming a case of “quick mortality” within a short time of sanction (within 12/24
months).
4.37 Margins created by book adjustments upon purchase of bills.
4.38 Income accrued at branch on Advances categorized as NPAs.
4.39 Wrong appropriation of recoveries in NPAs.
4.40 Right of recompense not recorded/ invoked, if stipulated at the time of sacrifice earlier made in
the borrowal account.
4.41 Leakage of income due to PC-cum-CC limits (where PC facilities are being wrongly credited to
CC to take advantage of lower interest rates)
5. ADVANCES-other Adverse features:

5.1 RBI prudential norms not followed (including in cases of substantial erosion of realisable
security).[Substantial erosion (of more than 50-90%) of the security to migrate the advance to
Doubtful/Loss category].
5.2 Existence of saleable/ realisable security in serious doubt.
5.3 Dilution of security and / or Valuation Report of Security / collaterals, not available.
5.4 Installment / interest not received regularly, and default of 90 days or more.
5.5 Legal or other action for recovery of advances not taken, although authorised by the Board /
Controlling Authority.
5.6 Terms of the BIFR scheme not complied.
5.7 Default in servicing of fresh facilities sanctioned pursuant to BIFR orders.
5.8 Delays in the settlement / repayment, in respect of one time settlement / compromise
proposals and sacrifice not adjusted.
5.9 Payment from government for invoked guarantees not received, although guarantees were
unconditional, irrevocable and payable on demand.
5.10 Compromise proposals pending at various levels where local government / outside agencies
are involved as guarantors.
5.11 Irregular / sick / sticky advances not reported to higher authorities.
5.12 Adverse decisions in litigation, not considered.
5.13 Credit card dues not serviced.
5.14 Advances to new borrowers notwithstanding that they are defaulters in other banks/
institutions.
5.15 Restructured Doubtful Accounts and fresh facilities by way of funding unserviced interest, not
considered for categorization/provisioning.
5.16 Repeated rephasement/ restructuring in the same account for evergreening the account.
5.17 Non-reckoning of the default in borrowal accounts transferred from other banks/branches,
affecting the classification thereof.
5.18 Copies of the Loan Documents not given to the Borrower at the time of the sanction or
Disbursement
5.19 Non obtaining of certification in respect of Corporate borrowers under Consortium/ multiple
banking arrangements from a CA/Company Secretary/Cost Accountant.
40
(Part of audit working papers on Audit File) CII.1
____________________BANK ZONE: ________________ REGION : __________ BRANCH : _____________
OBSERVATIONS/STATUS REVIEW ON MAJOR ADVANCES ACCOUNTS FOR THE YEAR ENDED 31.3.2018 (based on analysis of Annexure III and reporting)
Name of the Borrower___________________________________________

OBSERVATIONS OF BRANCH AUDITOR
1. Whether the Borrower requires reclassification Yes@ No Whether reported in Whether reported in LFAR
MOC
2. Has these been frequent devolvement of LCs Yes No Yes No Yes No
3. @Justification/observations requiring change in classification:
@ based on examination of the related account and to be reported as per the MOC
Signature of Audit Assistant

41

___________ BANK ZONE: ____________ REGION: ______________ BRANCH:____________________ ANNEXURE `C II.1.1
SUMMARY OF ADVERSE OBSERVATIONS ON ADVANCES ACCOUNTS AS AT 31.3.2018 (Illustrative)

(Other than Accounts subject to restructuring)
Name of Type of Account Year End Remarks- Classification Code * Valuation of security @@ Financial Effect of observations
the Facility No. Balance Adverse
Borrower (Rs.) Code @ By Recommended By Bank As per Auditor Provision (Rs) Income (Rs.) Remarks
Bank by Auditor (Rs.) (Rs.) (+) (-) (+) (-)
ABC TL 320555 3,38,500 1.5,1.6.3 A C 2,00,000 for all (+) (-) Doubtful over 3 years
1.10(b) facilities since 31-3-2015
Hence Loss Asset
CC 3245234 6,74,600 1.11,1.13 B C (+) (-)
Bills 45328/04 5,38,987 2.2,2.4,3.1 B C (+) (-)
------------,
15,52,087
= ======
DEF TL 23545 68,528 2.2,2.4,3.4 B B.1 55,00,000 for all (+) (-) Realisable security is
exposures less than 10% of total
exposure. Hence
Loss Asset
PC 112013 2,01,05,273 3.10,3.11,4.4 B B.1 (+) (-)
CC 125231 5,07,83,724 4.6,4.17 B B.1 (+) (-)
7,09,57,525
=========
@ Refer to description of Coded Adverse Features {Annexure C II}

@@ Wherever the auditor disagrees with the Bank
*CLASSIFICATION A. STANDARD B. SUB-STANDARD; C. DOUBTFUL(100%) D. LOSS

B.1 SUBSTANDARD 25 %) C.1 DOUBTFUL(OTHERS)

42
C II .2
BANK ________________: ZONE _________ REGION ________ BRANCH _______________
AnnexureC II.2 - Summary of Adverse features in Advances Accounts for the year 2017-18
Name of Borrower Outstanding balance Remarks Whether commented in

(Coded Adverse features) Main Report
31.3.2018 Refer Annexure C II.3 Yes No
Refer to alternate format `C II.1.1'

______________ BANK BRANCH_________________________ C.II.3 / D.5.1.1
FORM OF MOC RELATING TO ADVANCES AMOUNT IN RUPEES
Sr. No. Name of Borrower Account No. Type of Total Classification S/SS/D/L Reversal Net CHANGES SUGGESTED UNDER ALLOCATION OF ADVANCES Remarks
Account outstanding Branch Auditors Charges Interest outstanding Secured Covered by Guarantee of Total Provision as per
C/C,O/D,D/L unrealised by Tangible Bank Govt. ECGC/ Unsecured Branch Auditors
BP/BD of T/L Assets CGTSI
1 2 3 4 5 6 7 8 9= 4-(7+8) 10 11 12 13 14 15 16
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Coded adverse
features given in C II
SS= Sub Standard : D= Doubtful (to be classified as D1, D2, D3) : L= Loss
Note: See formats in D.5.1.2.1&2
If not covered by the coded remarks, the reasons may be seperately stated.
bnkad18.sanjay&mmk 44
BANK AUDIT - AUDIT IN EDP ENVIRONMENT C III
Banking technology has had to keep pace with the increasing demands of convenience banking of
customers; and the customers have been offered, and are increasingly using, extensive facility of
online and mobile banking.
Online banking, also known as internet banking, e-banking or virtual banking, refers to banking
that can be conducted in a computerized environment over the internet, by registering with the bank
online and creating a login ID and password; and transactions being conducted generally through a
bank’s website under a private profile. It is an electronic payment system that enables customers of
the bank to avail of banking services traditionally offered and to have the convenience of executing
transactions from any place, anytime without the necessity to physically go to the branch.
Mobile banking allows a customer to perform many of the same activities as online banking using a
smartphone or tablet instead of a desktop computer. However, simply accessing the bank’s website
on a mobile device is not the only method of mobile banking. Mobile banking’s versatility includes
using the bank’s mobile banking app to access one’s accounts, transfer moneys, paying bills etc.
This has necessitated extensive computerization in banks, which, however, comes with a bundle of
risks, unless addressed; and while the bank managements may take due care and caution in
establishing the best systems that work in a secure environment, and that ensure that
data/information generated has reliability ,integrity at all locations - from origin /source of economic
events/ transactions to their timely recording, transmission and final storage/retention, these need
to be tested out for their adequacy and effectiveness. Information assurance that is reliable reduces
audit risk and special periodic audits of systems become mandatory.
Some view IT audits as being one of only two type: "general control review" audits or "application
control review" audits.
Information Assurance Audit professionals consider there to be three fundamental types of controls
regardless of the type of audit to be performed.
Information assurance (IA) is the practice of assuring information and managing risks related to the
use, processing, storage, and transmission of information or data and the systems and processes
used for those purposes. This includes protection of the integrity, availability, authenticity, repudiation
and confidentiality of user data. It uses physical, technical and administrative controls to accomplish
these tasks. While focused predominantly on information in digital form, the full range of IA
encompasses not only digital but also analog or physical form. These protections apply to data in
transit, both physical and electronic forms as well as data at rest in various types of physical and
electronic storage facilities. Information assurance as a field has grown from the practice
of information security.
Many frameworks and standards try to break controls into different disciplines or arenas, terming
them “Security Controls“, ”Access Controls“, “IA Controls” in an effort to define the types of controls
involved. At a more fundamental level, these controls can be shown to consist of three types of
fundamental controls: Protective/Preventative Controls, Detective Controls and Reactive/Corrective
Controls.
In an IS system, there are two types of auditors and audits - internal and external. IS auditing, which
considers the potential hazards and controls in information systems, focuses on issues like
operations, data, integrity, software applications, security, privacy, budgets and expenditures, cost
control, and productivity is essentially a part of internal auditing, and is frequently performed by
internal auditors. The statutory auditor needs to review the findings of the internal audit as well as
the inputs, processing and outputs of information systems.
The overall IT/IS policy, processes, controls and accounting procedures and data generation are
implemented by the bank on a centralized level; and not having access to, or being able to test out,
the compliances, the branch auditors face practical problems at fully computerised branches. It is
for the central auditor to review whether the management is performing their role effectively as
regards IT and manual controls, accounting manual, entries and framework built in computerised
systems to generate data /information that is reliable and accurate . Independent IT Audit at
branches is generally not being done as may provide the necessary satisfaction to the branch
auditors to cover them for the risks related to system generated information. They do have access to
the daily exception reports generated by the system and access to primary records and entry level

transactions; and on the presumption that there are no flaws in the system, they go by compliance of
the exception reports, as a starting point.
The Branch auditors, however need to be aware of the overall system, both centralised and
decentralized (including month-end and year-end procedures) and the processes and
involvement of IT systems, data processing and data interface under various systems, the
extent of manual intervention and the complementary systems used at branches to process
the system generated information further.
The Branch auditors, should, if they cannot resolve the issues and matters concerning the
branch financial statements, need to bring this out in their report, as a disclaimer.
Audit Risks can very broadly concern Mismanagement of Assets ,Incorrect financial Statements
and Non-Compliance with laws and regulations, as can be observed from the following
broad background and some suggested procedures in a more traditional manner:
Characteristics Paper based Computer Based
Of risks
Audit Trail  Visible  May not always be available
 Easily certifiable  Even if available may not be always
 Adjustments are apparent generated
 Generated Audit trails may not be
understood
Volume  Low level Huge volumes possible
 Limited by speed of
manual processing
Records  Maintained together  Electronic
 Physical Security vital  Sorted by business requirement
 Stored anywhere in the world
Complex  Slow to process Consistent processing
transactions  Error prone
Audit Trail
Audit Trail is a means of tracing all activities affecting a piece of information such as a data or a
record from the time it enters the system to the time it ends where intended i.e. from input to output.
For example, when several people are working on a document in a networked environment, an audit
trail makes it possible to know at what stage and who made a change, or even to see a document
before and after that change.
IT environment risks
 Statutory and Regulatory
 Strategic
 Organisation
 Location
 Outsourcing
Statutory and Regulatory Risks
The Bank’s computer system should have the ability to respond to the changing requirements
of law and regulation, as otherwise there can be:
 Risks due to the change in legislative framework not being effectively addressed or not being
addressed on time
 Risk of non-compliance on account of changes in regulations of the supervisory authority or
the government
IT Operations Risks
 Error
 Interruption
 Disclosure
Transitional Action within the Bank( on switch-over to the computerized system)
In January 1998 RBI had initially compiled a guidance note to guide banks on:
- backup of old records
- retention of records in the system
- preservation in electronic media

INTERNAL CONTROL PROCEDURES

It is recognized that there are mainly four types of controls.
A. Deterrent that are designed, including with punitive measures, to deter people,
internal as well as external, from doing undesirable activities. For example,
written policies including the may deter people from doing undesired
activities.
B. Preventive that prevent the cause of exposure from occurring or at least minimise the
probability of unlawful event taking place. For example, security controls
at various levels like hardware, software, application software, database,
network, etc.
C. Detective that bring to surface, the existence of unlawful events aimed at arresting
the adversities caused or likely to be caused.
D. Corrective that are designed to recover from a loss situation. Business Continuity
Planning and disaster recovery is a corrective control. Without corrective
controls in place, the bank has risk of loss of business and other losses
due to its inability to recover essential IT based services, information and
other resources after the disaster has taken place.
The controls in CIS environment would include:
a. Controls on execution and recording of various e-banking and internet banking products;
and manual processing of items not covered
b. MIS reports being generated with reasonable periodicity thereof.
c. Major exception reports and the process of generation and compliance thereof.
d. Parameterisation of the statutory and regulatory requirements and its constant updation
from the real value date.
e. Process of generating information related to various disclosures in the financial
statements and the involvement of the IT systems.
f. Dealing with and resolution of data/system corruption, system break-down, etc., having
bearing on the preparation and presentation of financial statements.
g. Customer complaints related to mistakes in transactions (interest application, balances,
etc.),
h. Validation of the hardware and software to confirm that there is control over the
information and data that is retained at the highest levels of integrity at all stages from
inception , transmission, custody and final retention; and that there is no manual or other
intervention that can reopen or re edit such data.
The timing and extent of audit procedures is heavily dependent on the existence or otherwise of a
robust system of internal controls and strict compliance by the Management of such system. Based
on the level /gravity of the risk, the auditor will have to curtail or extend audit procedures. Additional
responsibilities cast on the auditors and the scope of their work getting extended in the areas of
reporting on offences involving frauds, fraudulent activities, foul play in banking transactions, require
the auditor to specially look into the systems and procedures laid down and the effectiveness of the
controls exercised by Management.
Internal control evaluation assists the auditor to determine the effectiveness or otherwise
of the control systems and of the integrity of the information/data generated and its reliability for
the purpose of his examination and reporting thereon. If evaluation reveals weaknesses, it enables
the auditor to strengthen his audit procedures, and to lay appropriate emphasis on the risk prone
areas. It needs to be emphasized that transactions in banks are voluminous though repetitive,
and fall into limited categories/heads of account. It would , therefore, be appropriate that the
evaluation of the internal controls is made for each class/category of transactions.
Internal controls would, inter alia, involve:

a) Segregation of duties between
* Authorising Supervisors and clerical officers
* Programmers and computer operators
* Asset record keepers and asset custodians

b) Software access control

 Examine the procedures for adding and deleting users
 Password control procedures
 Report on attempted access violations, including on ATMs
 Re-perform investigations on attempted violations
c) Physical access control
 Whether unauthorized staff gains access
 Whether program and data files are under control of proper authority
d) Completeness of output based on accuracy of inputs
- all source documents are received and transactions are entries/updated to a file
- Transactions that are lost, missing or duplicated during processing are detected / presented.
- Rejected transactions are subsequently updated.
e) Computer generated data, being of high integrity from inception till finish
(Daily normal and exceptional reports on systems and transactions assume importance)
 Whether seen by authorised persons and attended to as per delegation of authority
 File Continuity
-Check whether opening balances agree with the print out of the earlier data
-Check sample reconciliation reports
-See whether these are authorized by appropriate persons
f) Verification through exceptional reports
Examine the daily exception reports for:
- transactions
- system
and whether effective action is taken by appropriate independent authority on a daily basis.
g) Computer calculations
 Manually check a few calculations
 Re-perform a few calculations
h) Computer summarization
 Check manually with a listing of the transactions
 Arrange a special run and compare the results
i) Categorising and updating
 Check posting for a sample period
j) Authorisation of transactions and identification of the personnel responsible
Ensure that, as per the system:
- only bona fide transactions are processed
- transactions are authorised
- unusual transactions are identified
k) Detailed cycle level controls
Ensure complete, accurate and valid data to avoid duplication/errors in data.
l) Total cycle controls
- output of one update is used as input for the next update
- Prompt recovery in case of processing failure
The audit staff must enquire as to the results of any internal inspection/audit/concurrent audit
of the EDP systems to gauge any weaknesses that would have effect on their audit planning,
and the audit risks they need to address.
Special attention also needs to be paid to the back-ups and access thereto from off-site
storage locations as part of the disaster recovery management in the bank; and particularly
whether these have been tested.
Enquire into areas of manual intervention in the EDP data/information generated and the
related control procedures that may be risk prone.

C IV
BANK AUDIT - SUMMARY OF ADVANCES OF THE BANK AS AT 31ST MARCH 2018 (for knowledge)
Particulars Amount Rs.
Total Break up of Advances
Bills purchased and Cash Credits, Overdrafts Term Loans
discounted and Loans repayable in
demand
A.GROSS AMOUNT IN BORROWERS' ACCOUNTS AT THE
BRANCH LEVEL(includes for credit cards and interest
bearing staff advances)
Add:
a) Debit balances in Deposit Accounts
b) Invoked Guarantees/devolved L/Cs
TOTAL (A)
B. Less:
a. Amounts pending and capable of appropriation (ECGC/
CGFT(SSI) claims/other amounts recovered and held as
liability/ advances- related subsidies)
b. Interest applied in Borrowers’ accounts and held in Interest
Suspense/other similar account
c. Income derecognized on NPAs identified during the year
and included in A above
d. Participation on risk sharing basis – outstanding amounts,
if not included at the branches
e. Bills rediscounted, if included in (A) above as per
procedure applicable at Branch level
f. Advances held at branches but written off/ Prudentially

written off at H.O
TOTAL (B)
GROSS ADVANCES (A-B) OF THE BANK
Less: PROVISION (For sub-standard/ XXXX
Doubtful/Loss Assets)
BALANCE AS PER BALANCESHEET
See Notes on the following page

BANK BRANCH AUDIT
SUMMARY OF ADVANCES OF THE BANK AS AT 31ST MARCH, 2017 (for knowledge)….2
NOTES:
1. Advances (non-interest bearing) to employees, (such as Leave Fare Concession Advance, Festival Advance, Drought Relief Advance) should not be treated as part of the Advances
portfolio but are to be considered as part of "OTHER ASSETS-Others". However, if staff advances are interest bearing, these will be part of the Advances Portfolio.
2. Where borrowers' accounts are identified for the first time as NPAs, the unrealised income recorded in the borrowers' accounts, including for Govt. advances, must be reversed, and
to the extent recorded as
a) the current year's income, be derecognised/not treated as income; and
b) the income of the immediately preceding financial year, must be provided for, unless the laid down procedure of the Bank warrants the reversal of current year's income
for such (earlier year's) unrealised interest.
3. Where income is accrued in advances treated as "Standard" by the Bank Management, but such accounts are re-classified as sub-standard, doubtful or loss assets while finalising
the accounts, such interest income accrued but not realised, has also to be reversed, so that the provision can be worked out on the amounts, net of such reversal.
The practice of some banks to reverse such unrealized (applied) interest and give credit to the borrower, is risk prone for the banks, particularly in cases of litigation.
4. Provisions in excess of those necessary for Advances, would have to be treated as of the nature of "reserves" and not deducted from the "Advances". Provision made on adhoc
basis for standard advances would also be of this nature.
Provisions in respect of Standard Advances are part of OTHER LIABILITIES (Schedule 5) while for NPAs it will get reduced from Advances in Schedule 9. This applies to restructured
Advances as well, though as per Para 5.9.10 of the Master Circular the RBI has permitted such provisions to be netted from the advances
Provisions for Diminution of Fair Value (Para 5.9.10)
Provisions for diminution of fair value of restructured advances, both in respect of Standard Assets as well as NPAs, made on account of reduction in rate of interest and /
or reschedulement of principal amount are permitted to be netted from the relative asset.
.
Normal provisions need to be segregated from provision for sacrifice in restructured accounts that will be retained in a separate account, as also for FITL, carved out of interest in default.
5. Provisions are required to be made to the satisfaction of auditors, and if in the opinion of the auditors, provisions made/recommended by the Bank Management as per the
prudential norms of RBI are lower, the auditors would need to qualify their report indicating the shortfall.
6. Debit/adverse balances in Deposit Accounts would normally be “unsecured' advances.
7. Where recoveries are made in NPAs, and there are no instructions of the borrower, the credits in the borrowers' accounts should be appropriated in the following order, preference
being given to the oldest debits:
a) Charges, not recorded/reversed; thereafter
b) income not realised/recorded earlier;
- Interest Suspense
- Unapplied Interest
- Recompense amounts (earlier deferred in cases of sacrifice).
and thereafter
c) the principal amount,
Care must be taken to ensure that to the extent the borrowers' accounts are credited, the unapplied charges and income, and right to recompense, are first applied and
debited to the relevant accounts.
8. Interest should not be accrued as income on accounts identified as non-performing, and after the date of the last application of interest in the borrowal accounts, the interest needs to be
computed and recorded in the memoranda books on updated basis.

CV
BANK AUDIT : ASSET-LIABILITY MANAGEMENT
Guidelines on disclosure in the annual accounts for the year 2017-18

1. GENERAL
Reference may be made to the disclosure requirements in the Notes to Accounts of Banks, as
contained in Para 3.6 of the Reserve Bank of India Master Circular DBR.BP.BC
No.23/21.04.018/2015-16 dated 1-7-2015, pursuant to the RBI Guidelines on Asset- Liability
Management (ALM) System vide Circular No.DBOD.BP.BC.8/21.04.098/99 dated 10-2-1999 as
amended on 24.10.2007, vide RBI Circular No. DBOD.BP.BC.38/21.04.098/2007-08; requiring,
inter alia that;
(a) the banks may adopt a more granular approach to measurement of liquidity risk by splitting the
first time bucket (1-14 days at present) in the Statement of Structural Liquidity into three time
buckets viz. Next day , 2-7 days and 8-14 days.
(b) the Statement of Structural Liquidity may be compiled on best available data coverage, in due
consideration of non-availability of a fully networked environment. Banks may, however, make
concerted and requisite efforts to ensure coverage of 100 per cent data in a timely manner.
(c) the net cumulative negative mismatches during the Next day, 2-7 days, 8-14 days and 15-28
days buckets should not exceed 5 % ,10%, 15 % and 20 % of the cumulative cash outflows in
the respective time buckets in order to recognise the cumulative impact on liquidity.
(d) banks may undertake dynamic liquidity management and should prepare the Statement of
Structural Liquidity on daily basis.
Besides additional disclosures relating to movements in NPAs and lending to sensitive sectors, the
Reserve Bank of India has prescribed disclosures to be made in the annual financial statements of
the banks, by way of maturity pattern of:
 Deposits
 Loans and Advances
 Investments
 Borrowings
 Foreign Currency Assets and Liabilities
The requirement is to work out the Residual maturity of the related assets and liability of the assets
and liabilities to determine the mismatch, if any, for possible remedial action. Residual maturity means
the balance time that remains for the asset or liability to mature, calculated from the year-end.
Time Buckets
Based on the residual maturity, the assets and liabilities would fall in TIME BUCKETS, in which these
shall be placed. There are as many as 10 time buckets for the purpose of reporting as under:
1. Day 1
2. 2 – 7 days
3. 8 - 14 days.
4. 15 - 28 days
5. 29 days – 3 months
6. over 3 months upto 6 months
7. over 6 months upto 1 year
8. over 1 year upto 3 years
9. over 3 years upto 5 years
10. over 5 years.
Computer generated Data could be prepared, in the format as per Annexures or in any corresponding
manner and would be relevant. This needs to be signed by the authorised branch personnel in all
cases, and in case of audited branches, should be examined and attested by the auditor.
2. MATURITY PATTERN OF DEPOSITS
The deposits of a Bank can broadly be categorised as under:
A. Demand Liabilities
These do not have specific maturity patterns, and comprise:
- Deposits in current accounts
- Savings Bank Deposits
- Credit Balances in Cash Credit/Loan accounts
- Overdue/ matured deposits
By definition these being repayable "On Demand", it is difficult to predict the likely pattern of
the repayment of such deposits, and would, therefore, necessitate sophisticated statistical
techniques or other methods and procedures to determine the likelihood of outflows/maturity
patterns.
This exercise would necessarily have to be carried out at the centralised level by the
Banks.
51
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B. Time Liabilities
These have relatively predictable maturity patterns, and generally such liabilities (including
inland and foreign deposits and inter-bank term deposits), and fall into the following
categories, in respect of which relevant data would be required to be prepared by the branches:
 Fixed Term Deposits (with interest payment plans during the tenure/period of the deposits),
 Term Deposits in Re-investment schemes
 Cumulative Time Deposits(where interest is compounded)
Time Liabilities are required to be classified according to actual residual maturity of the relevant
deposits as at the year-end..
Residual maturity means the balance time that remains for the deposit to mature, calculated
from the year-end.
The data so prepared on individual deposits is required to be aggregated to fall into specific
period tranches, called Time Buckets, as explained above.
Residual Maturity Concept for Deposits

Deposits repayable after a specified term usually have a stipulated date when the deposits
mature. The date refers to a contractual maturity date on which the depositor may ask for
repayment/renewal. The time period that remains to elapse between the year-end and the
contractual maturity date is referred to as the "Residual Maturity" Period and can be illustrated
by the following, if there are 6 Term Deposits in a branch as under:
_______________________________________________________________________________
Date of Deposit Amount Rate of Interest Due date Time Bucket
(Rs.) %
_____________________________________________________________________________
01.04.2015 50,000 5 01.04.2018 (Explained
01.05.2017 2,00,000 5.5 01.08.2018 below)
01.08.2017 1,50,000 5.5 01.08.2018
30.12.2017 50,000 6 30.01.2019
01.01.2017 1,00,000 6 01.01.2018
01.01.2017 1,00,000 6 01.01.2019
_______________________________________________________________________________
While contractual maturity for the first deposit is for 3 years i.e 36 months, the deposit has already
completed more than 3 years. The balance period for which it will run till the next date of maturity
is 1.4.2018 MINUS the year-end date i.e. in this case the remaining period is 1.4.2017 MINUS
31.3.2018 i.e. one day. This is the residual Maturity of the deposit. Therefore, for the ALM returns,
the amount of this deposit will be shown as deposits maturing within 1 day.
Similarly, in respect of the next deposit, the remaining period is 1.8.2018 MINUS 31.3.2018 i.e. 4
full months. Therefore, this amount will be shown as maturing within 3-6 months time bucket.
Matured/Overdue deposits even if continuing in Term Deposit Ledgers would be reckoned
as demand Liabilities.
2. MATURITY PATTERN OF LOANS AND ADVANCES
It is cumbersome to generate precise data on the maturity pattern of advances in all classifications,
particularly in Cash credit accounts, overdrafts etc. Maturity Pattern of only advances categorized
and identified as STANDARD is more practical to be compiled by the Branches; and all NON
PERFORMING ADVANCES are required to be considered in maturity buckets as under:
Category of NPA Time Bucket

Sub-standard 3-5 Years
Doubtful/Loss Over 5 years
The Advances portfolio of a bank would generally comprise the following; and since the advances are
controlled at the branches, the relevant information would be obtained from them, or from the server,
in respect of the branch concerned - such information usually arising from:
52
CV
a) Bills transactions (bills purchased and discounted)

- Inland Bills Purchased
- Inland Usance Bills Purchased
- Inland Usance Bills Discounted
- Advance against Inland Bills for Collection (Supply Bills)
- Foreign Bills Purchased
- Foreign usance Bills Purchased
- Advance against Foreign Bills or Collection
Usance Bills Purchased and Inland Usance Bills Discounted

Details of Inland Usance Bills Purchased/Discounted need to be prepared by the branches in
the recommended format
Advances against Inland Bills for Collection-ABC (Supply Bills) are made in rare cases, and
the banks treat these as akin to the usance bills, as the realisability is according to the
terms of the underlying contract of supply. Details regarding maturity of ABC (supply bills)
would therefore, be furnished in their maturity buckets; and if against demand bills, the
outstandings should fall in the 1 day bucket
Foreign Usance Bills Purchased Advance against Foreign Bills for Collection
Foreign Usance Bill means any Foreign Bill purchased or discounted whether or not
under L/C, which has a due date on which it is expected to realise. As in the case of ABC
(Inland), if advance is made against foreign bills, the same treatment is given as above and
could be against sight bills (Demand Bills) which could not be purchased or negotiated.
Bills which are falling due Maturity Bucket
On 1-4-2018 1 day
Between 2.4.2018 and 7.4.2018 2 to 7 days
between 8.4.2018 and 14.4.2018 8 to 14 days
between 15.4.2018 and 28.4.2018 15 to 28 days
Between 29.4.2018 and 30.6.2018 29 days to 3 months
between 1.7.2018 and 30.9.2018 3 months to 6 months
between 1.10.2018 and 31.3.2019 6 months to 1 year
between 1.4.2019 and 31.3.2020 1 year to 3 years
between 1.4.2021 and 31.3.2023 3 years to 5 years
On or after 1.4.2023 Over 5 years
b) Term Loans
The Maturity pattern of Term Loans is to be computed on the basis of the interim cash
flows i.e. according to the stipulated repayment schedule.
c) Loans re-payable on demand
- Cash Credits
- Overdrafts (including temporary overdrafts and adverse balances in deposit accounts)
- Demand Loans
- Packing Credits
3. MATURITY PATTERN OF INVESTMENT SECURITIES
The investment portfolio of banks is generally controlled on a centralized basis and the maturity
patterns can be worked out at that level. Branches may not, therefore be expected to submit any
information on this item, even if they hold investments on behalf of the Head office.
4. MATURITY PATTERN OF BORROWINGS
Borrowings include re-finance and in the normal course such activities take place at selected few
branches. The information relating to Maturity pattern of these Refinance/Rediscount is also available at
Head Office. Certification of Maturity pattern of Borrowings in the stipulated Buckets can be done at
such branches, and counter-checked at Head Office.
5. MATURITY PATTERN OF FOREIGN CURRENCY ASSETS AND LIABILITIES
Foreign currency assets and liabilities are not expected to be held/ incurred at other than certain
branches, usually designated as À' category branches. The statement with regard to these would be
prepared and forwarded by only such Branches for consolidation at Head Office.
The RBI directives coincide with the introduction of Asset-liability Management System (ALM) in
Banks during the year 2000-2001. Since the disclosure requirements are mandatory in nature, the
banks would already have devised appropriate forms and returns to ensure that the required data is
expeditiously available from the branches for consolidation and incorporation thereof in the annual
audited accounts.
53
CV
REFERENCE MAY BE MADE TO THE FOLLOWING FORMATS IN THE RBI GUIDELINES

BANK:
INFLOWS AMOUNT (Rs.in crores)

RESIDUAL MATURITY IN TIME
BUCKETS
1. Cash
2. Balances with RBI
3.Balances with other Banks XXX XXX XXX XXX XXX XXX
(i) Current Account
(ii) Money at Call and Short Notice, Term Deposits and other
placements
4.Investments (including those under Repos but excluding
Reverse Repos)
5. Advances (Performing) XXX XXX XXX XXX XXX XXX
(i) Bills Purchased and Discounted (including bills under
DUPN)
(ii) Cash Credits, Overdrafts and Loans repayable on demand
(iii) Term Loans
6. NPAs (Advances and Investments) *
7. Fixed Assets
8. Other Assets XXX XXX XXX XXX XXX XXX
(i) Leased Assets
(ii) Others
9. Reverse Repos
10. Swaps (Sell /Buy)/ maturing forwards
11.Bills Rediscounted (DUPN)
12. Interest receivable
13. Committed Lines of Credit
14. Export Refinance from RBI.
15. Others (specify)
C. TOTAL INFLOWS
D. MISMATCH ( C-A )
E. MISMATCH as % to OUTFLOWS
(D as % to A)
F. CUMULATIVE MISMATCH
G. CUMULATIVE MISMATCH
as a % to CUMULATIVE OUTFLOWS
( F as a % to B)
* Net of provisions, interest suspense and claims received from ECGC/DICGC.
54
CV
BABANK:
STATEMENT OF STRUCTURAL LIQUIDITY AS ON 31-3-2018
OUTFLOWS AMOUNT (Rs. In crores)
RESIDUAL MATURITY TIME BUCKETS (to
be given in columns)
1. Capital
2. Reserves & Surplus
3. Deposits XXX XXX XXX XXX XXX XXX XXX
(i) Current Deposits
(ii) Savings Bank
Deposits
(iii) Term Deposits
(iv) Certificates of
Deposit
4. Borrowings XXX XXX XXX XXX XXX XXX XXX
(i) Call and Short Notice
(ii) Inter-Bank(Term)
(iii) Refinances
(iv) Others (specify)
5.Other Liabilities & Provisions XXX XXX XXX XXX XXX XXX XXX
(i) Bills Payable
(ii) Provisions
(iii) Others
6.Lines of Credit committed to XXX XXX XXX XXX XXX XXX XXX
(i) Institutions
(ii) Customers
7. Unavailed portion of Cash Credit / Overdraft /
Demand Loan component of Working Capital
8. Letters of Credit /Guarantees
9. Repos
10. Bills Rediscounted (DUPN)
11.Swaps (Buy/Sell) /maturing forwards
12. Interest payable
13. Others (specify)
A. TOTAL
OUTFLOWS
B. CUMULATIVE OUTFLOWS
The disclosures on the items mentioned above are required to be attested by the Auditors, since these
form a part of the audited information. To the extent relevant, the branch auditors need to certify the
information at the branch level; and to the extent they are not satisfied on the basis of the computation at
the branch, they may qualify their report.
REFERENCE MAY BE MADE TO THE MANNER OF PREPARATION OF THE RELATED INFORMATION BY THE
BANK AS GIVEN IN THE FORMATS FOLLOWING (Pages 56to 60).
55
BANK AUDIT : ASSET-LIABILITY MANAGEMENT - FORMATS CV
DETAILED STATEMENT OF RESIDUAL MATURITY OF TERM DEPOSITS AS AT 31.3.2018
Date of Deposit (Rs.) Interest Residual Maturity based on 31.3.2016 (maturity date less 31.3.2018) Amount (Rs.)
Deposit Rate
1day 2-7 days 8 - 14 15 - 29 Over 3 Over 6 months Over 1 Over 3 Over 5
days 28d days months upto 1 year year years years
%
ays to 3 upto 6 upto 3 upto 5
month months years years
s
TOTAL XX
Notes: 1.
2.
56

BANK AUDIT : ASSET-LIABILITY MANAGEMENT - FORMATS CV
MATURITY PATTERN OF BILLS (STANDARD CATEGORY) AS ON 31.3.2018
Amount (Rs.)
Borrower Nature of Borrower Balance of which maturing in
No. Limits Name outstanding
1 day 2 to 7 8-14 15 to 28 29 days to Over 3 Over 6 Over 1 Over 3 Over Total
days days days 3 months months months year and years 5
and upto and upto 1 upto 3 and upto years
6 months year years 5 years
TOTAL
Note : Bills overdue as on 31.3.2018 should be reported in the 1day’s time bucket.
57

BANK AUDIT : ASSET-LIABILITY MANAGEMENT CV
FORMAT OF DETAILS OF INLAND TERM LOANS IN STANDARD CATEGORY OUTSTANDING AS ON 31.3.2018

BRANCH ______________________________ BRANCH CODE _____________ REGION ____________________
Borrower’s Sanction Loan Amount Periodicity of No. of Amount of Installment Amount Amount
Name Particulars installments Installments Installment starting from outstanding overdue
Rs. (3/6/12) @ Rs. (DD/MM/YY) Rs. (If any)
Rs.
TOTAL XXX XXX XXX XXX
Notes: @ 3 for Quarterly, 6 for Half yearly, 12 for yearly for convenience.
For the sake of convenience the numerals may be used
Quarterly 3: Half yearly 6: Yearly 12
58

CV
ASSET LIABILITY MANAGEMENT
BANK AUDIT 2017-18
BANK:_______________________________________
STATEMENT SHOWING MATURITY PATTERN OF ASSETS AND LIABILITIES Amount (Rs. In Crores)
MATURITY PATTERN Time Buckets
AS ON 31-03-2018 OF
Over 3 Over 1 Over 3
29 days Over 6
2 to 7 15 to months and year and years over 5
Day 1 8-14 days and upto months and Total
days 28 days upto 6 upto 3 and upto years
3 months upto 1 year
months years 5 years
LOANS & ADVANCES

(GROSS)*
INVESTMENT
SECURITIES (GROSS)
DEPOSITS*
BORROWINGS
(GROSS)
FOREIGN CURRENCY
ASSETS
FOREIGN CURRENCY
LIABILITIES
Notes:1. * excluding foreign currency deposits and advances, which are included in foreign currency Assets and Liabilities.
2. The figures in the case of foreign currency assets and liabilities are after revaluation at the year end FEDAI rates.
3. Note on the following lines: The above maturity pattern has been compiled by the management from the information received from the
branches, and ratios arrived at as per RBI guidelines for determining core and volatile portion and apportionment made at Head Office
on the basis of behavioral or contractual residual maturity wherever applicable.
59
BANK AUDIT 2017-18 C V
ASSET LIABILITY MANAGEMENT 2017-18 (RECONCILIATION OF ALM WITH BALANCE
SHEET) - ILLUSTRATIVE COMPARATIVE WORKSHEET
Rs. IN CRORE
LOANS & ADVANCES
ALM
ADD
FOREIGN CURR. LOANS
LESS
PROVISIONS
IDBI BILLS REDISCOUNTED
INTEREST SUSPENSE
F.C.TERM LOANS REVALUATION
EBR REVALUATION A/C
CASH CREDIT - FOREIGN
CURRENCY(PCFC)
F.C.D.L.A/C
DICGC CLAIMS SETTLED
RECEIVABLE FROM GOVT.
NON-INTEREST BEARING STAFF
ADVANCES
MISC. PORTION OF PROTESTED BILLS
SUB-TOTAL
ADD
ADJUSTMENTS
MOC ON CC/OD/DL
MOC ON TERM LOANS
SUB-TOTAL
AS PER BALANCE SHEET
DEPOSITS
ALM
ADD
FOREIGN CURR. DEPOSITS
INVESTMENTS
ALM
LESS
HAIR CUT ON LISTED SHARES

BANK AUDIT (2017-18) CC
Text of Management Representation Letter to be obtained from the Branch Management
M/s ___________________
Chartered Accountants,
__________________
Dear Sirs,
Re: Audit of the annual financial statements of our Branch for the year 2017-18
This representation letter is provided in connection with your audit of the financial statements of
_____________ Branch of _______________________(Bank), for the year ended March 31, 2018
for the purpose of expressing an opinion as to whether the financial statements give a true and fair
view of the state of affairs of the said Branch as of March 31, 2018 and of the results of operations
for the year then ended. We acknowledge our responsibility for preparation of financial statements in
accordance with the requirements of the Reserve Bank of India and recognised accounting policies
and practices, including the Accounting and Auditing Standards issued by the Institute of Chartered
Accountants of India (ICAI); as also with the Circulars issued pursuant thereto and in line therewith
from time to time and as applicable to the Branch.
The statements/returns furnished for audit, prepared at the Branch, have been pre-reviewed,
authenticated and incorporate information/ data, strictly in accordance with the laid down instructions
of the Bank.
We confirm, to the best of our knowledge and belief, the following representations:
1. Accounting Policies
The accounting policies, which are material or critical in determining the results of operations for
the year or state of affairs as applicable to the Branch and there are no changes in the
accounting policies/practices followed by the branch during the current year.
The financial statements are prepared on accrual basis.
We are not aware of any other changes in the Accounting Policies/practices, as have a bearing
on the financial statements of the branch for the year under audit.
2. Previous Reports - Compliance
We have made available to you the following latest reports on the accounts of our branch, and
compliance by the branch on the observations contained therein:
h) Quarterly review report (s);
j) Special inspection/investigation report/ stock audit.
Due to effective compliance of the above, the Branch has not received any
communication/intimation/ advice based on monitoring/review/inspection or a show cause,
including from Government of India, Reserve Bank of India or any other monitoring or
regulatory authority; and there are no significant issues /matters remaining unattended that
could have a material effect on the financial statements of the Branch during the year or that
may require any action at the Branch.
3. Books maintained in the EDP environment

The books of the accounts are computerised and hence the subsidiary records are
automatically balanced with the relevant control records, except as otherwise mentioned. In
case of manual sub-ledgers maintained, we confirm that they duly match with the general
ledger balances.
The Branch has attended to all “exception reports” generated during the year, and remedial
action, wherever required has been taken; and there are no major adverse issues/matters that
are pending as at the year end.

Manual intervention to the system generated financial data, wherever required, has been
attended to in the preparation of and incorporation in the financial statements of the Branch,
and are duly authorized as per the laid down procedure.
4. ASSETS
The branch has a satisfactory title to all assets and there are no liens or encumbrances on the
assets of the Branch. The Municipal dues/ local levies / demands and lease/rentals pertaining
to the Branch premises have been duly paid / provided, based on the claim/agreement for the
time being in force, including demands/claims where the rent/lease agreement has expired.
5. Cash and Bank Balances
We confirm that the Branch has followed the laid down system of cash verification at periodic
intervals and of its tallying with the book balances; and confirm that there were no
discrepancies noticed therein during the year.
The Cash balance (including at the sub offices, imprest balances, ATMs attached to the
Branch), as on March 31, 2018 is Rs. ________as verified by us, tallies with the book records.
The balance shown by the year end scroll extracted from the ATM and book balances have
been tallied and the differences between these balances have been analysed and MOC
considered in respect of the same.
Balances held by agents for replenishment of cash in the ATMs, have been appropriately
reflected as CASH of the Branch.
The Branch has obtained and made available, balance confirmation certificate(s) for balances
maintained with other bank(s) and the balances in respect thereof, have been reconciled as at
the year end, requiring no adjustments in respect of any entries prior to the year end.
In respect of Currency Chest deposits/withdrawals, all entries up to the year end have been
simultaneously duly incorporated in the accounts of the Branch, to enable reflection of the
correct balance of the account maintained with the Reserve Bank of India at the link office.
With regard to demonetization, we confirm that there is no adverse feature pointed out
as regards our branch in respect of any investigation, review, examination,
internal/concurrent audit, enquiry or any other internal supervisory mechanism, and
nothing that cause the belief or concern that there has been a fraud involving any
customer/employee that has any adverse pecuniary effect having implications on the
branch financials for the year 2017-18.
6. Advances
6.1 The Branch has a system of internal monitoring, supervision and control over the advances in
all aspects, including in particular the periodic verification of the existence and the realizable
market value of the tangible and other securities charged to the bank In respect of the
advances and the Branch has through such inspection procedures that were necessary and
done, satisfied itself that as at the year end, the same has been considered while classifying
the advances as per their health status in line with the RBI norms.
6.2 We have examined the advances accounts and have categorised the borrowers, according
to the applicable prudential norms and the regulatory parameters prescribed by the Reserve
Bank of India (RBI) , for the purpose of provision and income recognition, into standard, sub–
standard, doubtful or loss assets, except as otherwise permitted as per the said prudential
norms. The borrower-wise categorization is based on the most adverse status in any credit
facility, including that as an investee, except as otherwise permitted in cases like BIFR/
restructured accounts, where the accounts are classified, as required. The information
relating to the borrowal accounts maintained at the Branch has been reviewed with reference
to the recorded and updated loan procedures followed, including appraisals, sanction,
documents and further monitoring and supervision and reference to adverse comments, if
any, in the inspections/audit, irrespective of the physical location of the loan procedure
documents.
The borrowers’ accounts have been simultaneously been categorized into those that are
performing assets or non performing assets (NPAs).
6.3 The classification status of the borrowers made as at the end of the previous year has not
been upgraded and changed to a better classification, except where such upgradation was
permitted as per the RBI prudential norms, or so justified due to recoveries in accounts, or
the curing of the defaults (including recovery of arrears of interest and principal), that were
the cause of the earlier adverse categorization.

6.4 While income is generally accrued and recorded in the accounts of borrowers categorized as
‘Standard’ and performing, no income has been recorded on Non–performing Accounts other
than on actual realisation.
No income has been adjusted / recorded to revenue, contrary to the norms of income
recognition notified by the Reserve Bank of India; and particularly where the chances of
recovery/realisability of the income are remote.
6.5 It is further confirmed that:

a. due care has been taken at the time of appraisal, sanctioning, disbursements and
thereafter at the time of renewals/ review, that the borrower is not in negative list or list of
willful defaulters.
b. stock audits/inspections have been carried out in the case of the borrowers (including
NPAs, at the prescribed periodicity), in case of credit facilities against the inventories to
determine the existence and valuation thereof wherever required, to gauge the adequacy
of the primary security (particularly, where mandatorily required), and the adverse
observations arising therefrom, have been attended to and considered in categorization
of the borrower as per applicable norms.
c. the drawing power/limit has been worked out in the case of credit facilities by the Bank
and in consortium/multiple banking arrangements, by application of the requisite margin
(only on the net paid for stocks, where the credit facilities are against such primary
security).
d. in case of consortium/multiple banking arrangements, the prescribed due diligence

reports from other banks have been obtained and are on record, except as otherwise
stated below:
e. all advances where renewal of limits was required, have been duly reviewed and the
limits renewed within the prescribed time, and no borrower has become NPA on this
account up to the year end.
7. Fixed Assets/ Depreciation
The fixed assets held by Branch have been properly accounted, including purchases during the
year on the correct dates of acquisition and these have been physically verified and reconciled
with the book records as at the year end. No discrepancies are noticed on such verification.
Depreciation on these assets have been adequately provided as per the policy of the bank.
Capital Commitments
At the balance sheet date, there were no outstanding commitments for capital expenditure,
other than those disclosed in the financial statements.
8. Stationery
Unused Stock of security paper stationery like Cheque books, Drafts, Pay Orders, Banker’s
Cheques, Deposit Receipts, Cash Certificates, Stamped Guarantees and similar stationery,
have been verified and tally with the records maintained at the Branch and these have also
been produced for your verification. Dual controls on receipt, custody, issue and holding of
such stationery, have been followed and there have been no exceptions reported in this regard
at the Branch.
9. Other Current Assets

Outstandings In Suspense and similar nominal heads of account
The break up of amounts outstanding in Sundry deposits and similar nominal heads of account
/Sundry assets as at the year end have been properly disclosed and the amounts are justified
to be retained at the Branch as per the system of the Bank.
In the opinion of the Branch management, the other current assets have a value on realisation
in the ordinary course of the business which is at least equal to the amount at which they are
stated in the Branch balance sheet.

LIABILITIES
10. The Branch has recorded all known liabilities in the financial statements.
11. Overdue/ Matured Term Deposits
All overdue/ matured term deposits are held as demand/current deposits.
Term Deposits are subject to the scheme of the Bank for automatic renewal, unless otherwise
instructed by the Deposit holders, the renewals being for the same period as the matured
deposit; and entries are generated through the system for such renewals on due dates. This is
done net of tax deduction at source. Provision for interest at the year end, is properly made for
deposits not contractually due, and is also subject to such deduction at source.
We confirm that the credit in the term deposit accounts/ renewals on due dates (net of
applicable tax), is backed up with adequate controls including by issuance of deposit receipts
in cancellation of the matured deposit receipts or by duly recorded endorsements on the
inverse of the existing receipts. There is control over the unissued receipts, in that these are
issued only when the originals are returned to the Bank. We confirm that there is no breach of
this system at the Branch; and the Branch does not hold any issued receipts that have not been
dispatched to the deposit holders.
12. CONTINGENT LIABILITIES
12.1 The Branch has disclosed in the relevant returns prescribed for the branch, all;
(a) guarantees given to third parties;
(b) Letters of Credit (Local/Import);
(c) Letters of Comfort (Local/Import);
(d) Deferred Payment Credits/Guarantees (Local/Import); and
(e) all other contingent liabilities/obligations.
12.2 Other than for advances, there are no matters involving the Branch in litigation, arbitration or
disputes requiring any provisions/ adjustments in the financial statements or disclosure as
contingent liability having bearing on the Branch financial statements, except as otherwise
stated in the returns/data compiled for this purpose for onward submission to the Controlling
Authority. The Branch has not received any legal notices/claims (including staff claims) for any
statutory or regulatory defaults or claims relating to municipal taxes or local levies or from
customers in relation to the Branch in the course of its business, involving any liability which are
likely to result in a loss/detriment requiring adjustment to the Branch assets or liabilities.
12.3 All contingent obligations assumed are duly incorporated in the Branch records and all
outstanding obligations, including in respect of Guarantees, Letters of Comfort and similar
obligations assumed and outstanding at the year end at the Branch, have been disclosed net
of margins; and where such obligations have ceased these have been correctly deleted from
the branch records/ returns, including in respect of expired guarantees (where the claim
period has also expired) and invoked guarantees/obligations that have been duly discharged.
12.4 Provisions for Claims and Losses

Provision has been made in the accounts for all known expenditure, losses and claims of
material amounts.
13. Profit and Loss Account
13.1 Except as disclosed in the financial statements, the results for the year were not materially
affected by:
(a) transactions of a nature not usually undertaken by the branch;
(b) circumstances of an exceptional or non–recurring nature;
(c) charges or credits relating to prior years;
(d) changes in accounting policies
13.2 Interest Expended/ Earned and Provisions

(a). On Deposits, Interest has been paid/ provided as contractually due in accordance with
the extant instructions of the Controlling Authority/Head office, net of the stipulated Tax
deduction at source.

(b). On Advances identified during the year as NPAs, the interest earlier accrued as income
(and debited to the borrowal accounts), but remaining unrealized, have been
derecognized as income and treated as Interest Suspense; whereafter, the interest
otherwise contractually due, is not recognized as income earned and is not debited to
the borrowal accounts, as per the system in vogue. Record of such unapplied Interest
is separately maintained for potential recovery.
(c). Interest as communicated by the Controlling Authority/Head Office on account of
Transfer Pricing mechanism/Inter branch balances, up to the year end, has been
adjusted at the Branch, as per the laid down system.
13.3. Provisions/adjustments usually made at Head Office:
No adjustments/ provisions have been made in the accounts of the Branch in respect of
matters usually dealt with at Head Office, including in respect of:
(a) Bonus, ex-gratia, and other similar expenditure and allowance to branch employees;
(b) Terminal permissible benefits to eligible employees on their retirement (including additional
retirement benefits), Gratuity, Pension, and liability for leave encashment benefits, and
other benefits covered in terms of ‘AS 15- Employees Benefit’ issued by Institute of
Chartered Accountants of India;
(c) Arrears of salary/wages/allowances, if any, payable to staff;
(d) Staff welfare contractual obligations;
(e) Old unreconciled / unlinked entries at debit under various heads comprising Inter branch
/office adjustments;
(f) Effect of conversion of outstanding Branch balances in foreign exchange as per the system
followed;
(g) Auditors’ fees and expenses;
(h) Items in Suspense, clearing differences, Credit Cards, Frauds/ vigilance cases involving
claims/ liability or loss to the Bank and other provisions on behalf of the Branch;
(i) Provisions in respect of advances as per applicable prudential norms and guidelines of the
Reserve Bank of India and the Bank’s policy in the line therewith (including on standard
advances, floating, ad hoc/generic provisions covering weak standard advances); in
respect of which, unless otherwise stated, is to be considered also in line with the Branch
returns relating to classification prepared at the Branch;
(j) Adjustments/provisions in respect of Interest Suspense and Unapplied Interest for the
earlier year for advances identified as NPA during the year reported in the Memorandum
of Changes (MOCs) ;
(k) Provision for clearing difference and Sundry Assets outstanding, if any, long pending; and
(l) Taxation (subject to adjustments for deferred tax up to the year end).
14. There have been no events subsequent to the balance sheet date that require adjustment of or
disclosure in, the financial statements or notes thereto.
15. Long Form Audit Report — Branch Response To The Questionnaire

In connection with the Long Form Audit Report, complete information as regards each item in
the questionnaire has been made available to you in order to enable you to verify the same for
the purpose of your audit.
16. Other Certification
Duly authenticated, information as regards other matters which, as per the Bank’s letter of
appointment, require certification has been made available to you.
17. General
There is no enquiry going on or concluded during the year by Central Bureau of Investigation
(CBI) or any other vigilance or investigating agency/ authority on the Branch or on its
employees and no cases of frauds, suspected frauds or of misappropriation of Assets of the
branch have come to the notice of the Branch Management during the year other than those
recorded and duly reported in the relevant return relating to frauds to the Controlling
Authority/Head Office.
The provision for non–performing assets, depreciation, provision for income tax, provision for
bonus, gratuity, etc., is made at the Head Office. Therefore, the same has not been provided in
the branch accounts.
18. There have been no irregularities involving management or employees who have a significant
role in the system of internal control that could have a material effect on the financial
statements.

19. The Bank has a system to convert its foreign currency balances outstanding at the year end
rates on a centralized basis; and all balances of this nature at the Branch have been
communicated for this purpose to enable the Controlling Authority to align the balances with the
applicable year end rates.
20. The financial statements are free of material misstatements and omissions.
21. The Branch has complied with statutory/regulatory/accounting requirements and all contractual
obligations that could have a material effect on the financial statements. There has been a
faithful compliance of the KYC norms at the branch.
22. The Branch neither has, nor has it been communicated any plans or intentions that may
materially affect the carrying value or classification of assets and liabilities reflected in the
financial statements.
23. The other particulars required have already been given to you and particulars and other
representations made to you from time to time are true and correct in all respects.
24. Tax Audit
The information required for the tax audit under section 44AB of the Income–tax Act, 1961 has been made
available to you in order to enable you to verify the same for the purpose of your report thereon. In respect
of the Tax Audit, we certify the following:
PART – A
Our status as defined under the Income Tax Act, 1961 is a Company; our Permanent Account No., the
jurisdiction under section 124 of the Income–tax Act, 1961 and other Indirect taxes Registration nos. as
communicated by Head office, has been incorporated correctly in the Form.
PART – B
o There is no change in nature of business in current year as compared to preceding previous year.
o The books of account maintained by us have been correctly disclosed in the prescribed form.
o Our Profit & Loss does not include profits and gains assessable on presumptive basis under sections
44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, 172 of the Income–tax Act, 1961.
o The method of accounting followed has been consistently followed in the immediately preceding
previous year. There was no change in the method of accounting employed vis–à–vis the method
employed in the immediately preceding previous year. The Accounting Policies of the Bank may be
referred to, as applicable to the Branch.
o No amounts have been credited in Profit and Loss account as required under clause 16 of Form 3CD.
o Sums received from employees towards contributions to any provident fund or superannuation fund or
any other fund mentioned in section 2(24)(x) which is paid/not paid within due dates to concerned
authorities under section 36(1)(va) are mentioned in Clause 20 (b) of our Form 3CD and the same are
correct.
o In Clause 21(a) of Form 3CD, there are no other amounts of such items debited to Profit & Loss
Account.
o No Interest is paid to Micro, Small and Medium Enterprises which is inadmissible under clause 22 of
Form 3CD
o No payments are made to persons specified under section 40A(2)(b).
o There is no amount of profit chargeable to tax u/s. 41 as disclosed under clause 25 of Form 3CD.
o Except for the items shown under clause 26(B) of Form 3CD, no tax, duty or other sum as referred to
Under Section 43B has been provided as at the year end.
o No expenditure/ income of an earlier year has been debited/ credited to the Profit & Loss Account
except to the extent disclosed under clause 27(b) of Form 3CD.
o Section–wise details of deduction admissible under Chapter VI–A.
o No other deductions other than those mentioned in clause 33 of Form 3CD are available to the branch.
o The details of tax deducted at source as required under clause 34(a),(b) &(c) of Form 3CD is given
separately in the Format provided by Head Office
The other particulars and information which have already been given to you and other representations made to
you from time to time are true and correct in all respects.
Thanking you,
Yours faithfully,
Branch Authorised Signatory

BANK AUDIT 2017-18 AUDIT REPORTING – MAIN REPORT
D
Introduction:
While the Banks may require the branch auditors to give their reports in the form and manner
stipulated in the appointment letter, the compliance of the auditing standards reporting requirements
need to be kept in view as per:
a. SA 700, “Forming an Opinion and Reporting on Financial Statements”;and
b. SA 705, “Modifications to the Opinion in the Independent Auditor’s Report” , where modified; and,
c. SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report” (as applicable).
The bank branch auditors who require to address their reports to the Central Statutory auditors of the
bank, need to quantify their observations in the Memorandum of Changes that forms part of their
report.
Circumstances that m ay r esult in o ther than an Unqualified Opinion, due to factors like
limitation on scope, disagreement with management, disagreement on Accounting Policies
etc.
Types of Modified Opinions:

a. A qualified opinion should be expressed when the auditor concludes that an unqualified
opinion cannot be expressed but that the effect of any disagreement with management
is not so material and pervasive as to require an adverse opinion, or limitation on
scope is not so material and pervasive as to require a disclaimer of opinion. A qualified
opinion should be expressed as being ‘subject to’ or ‘except for’ the effects of the matter
to which the qualification relates.
b. A disclaimer of opinion should be expressed when the possible effect of a limitation on
scope is so material and pervasive that the auditor has not been able to obtain
sufficient appropriate audit evidence and is, accordingly, unable to express an opinion
on the financial statements.
c. An adverse opinion should be expressed when the effect of a disagreement is so
material and pervasive to the financial statements that the auditor concludes that a
qualification of the report is not adequate to disclose the misleading or incomplete nature
of the financial statements.

D.1
An Illustrative Format of Report of the Branch Auditor of a Nationalised Bank, has been given by the
Institute of Chartered Accountants of India, at Appendix V of the Guidance Note on Audit of Banks
(Latest edition), as under:
“Independent Bank Branch Auditor’s Report

To,
The Statutory Central Auditors
________ Bank
Report on Financial Statements
1. We have audited the accompanying Financial Statements of _______________Branch of ____________
(name of the Bank) which comprise the Balance Sheet as at 31st March 20XX, Profit and Loss Account for
the year then ended, and other explanatory information.
Management’s Responsibility for the Financial Statements:

2. Management of the Branch is responsible for the preparation of these Financial Statements that give true and
fair view of the financial position and financial performance of the Branch in accordance with the Banking
Regulation Act, complying with Reserve Bank of India Guidelines from time to time. This responsibility
includes the design, implementation and maintenance of internal control relevant to the preparation and fair
presentation of the financial statements that are free from material misstatement, whether due to fraud or
error.
Auditors’ Responsibility:
3. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our
audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India.
Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material misstatement.
4. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The Procedures selected depend on the auditors’ judgement, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the branch’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of the accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements
5. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
Audit opinion.
Opinion
6. In our opinion, and to the best of our information and according to the explanation given to us, read with the
Memorandum of Changes mentioned in paragraph 11 below, the financial statements give a true and fair view
in conformity with the accounting principles generally accepted in India:
(a) in the case of the Balance Sheet, of the state of affairs of the Branch as at March
31, 20XX; and
(b) in the case of Profit and Loss Account, of the Profit / Loss for the year ended on that date;
Report on Other Legal and Regulatory Requirements
7. The Balance Sheet and the Profit and Loss Account have been drawn up in accordance with Section 29 of the
Banking Regulation Act, 1949;
8. Subject to the limitations of the audit as indicated in Paragraphs 3 to 5 above and paragraph 10 below, we
report that:
a. We have obtained all the information and explanations which to the best of our knowledge and belief were
necessary for the purpose of the audit and have found them to be satisfactory.
b. The transactions of the branch which have come to my/our notice have been within the powers of the Bank.

D.1
9. We further report that:
a. the Balance Sheet and Profit and Loss account dealt with by this report are in agreement with the books of
account and returns;
b. in our opinion, proper books of account as required by law have been kept by the branch so far as appears
from our examination of those books;
Other Matters Paragraph
10. No adjustments/provisions have been made in the accounts of the Branch in respect of matters usually dealt
with at Central Office, including in respect of:
(a) Bonus, ex-gratia, and other similar expenditure and allowances to branch employees;
(b)Terminal permissible benefits to eligible employees on their retirement (including additional retirement
benefits), Gratuity, Pension, liability for leave encashment benefits and other benefits covered in terms
of ‘AS 15 –Employee Benefits’ issued by the Institute of Chartered Accountants of India;
(c) Arrears of salary/wages/allowances, if any, payable to staff;
(d) Staff welfare contractual obligations;
(e) Effect of adjustments that might arise upon the reconciliation/ matching of outstanding entries in the inter
office accounts impact of which is presently not quantifiable;
(f) Interest on overdue term deposits;
(g) Depreciation on fixed assets;
(h) Auditors’ fees and expenses;
(i) Taxation (Current Tax and Deferred Tax);
(j) Provision for Standard Assets including Restructured Accounts, Teaser Loan;
(k) Additional provision for sub-standard infrastructure loan accounts;
(l) Provision for unsecured portion and diminution in fair value in respect of Restructured accounts;
(m) Provision for Asset Doubtful of Recovery, Fraud etc.
(n) Provision for FITL.
(o) Project where DCCO has been extended.
(p) Provision for Clearing difference and Sundry Assets outstanding if any long pending.
(q) Provision for unhedged foreign exchange exposure of borrower entities.
1
11. The following is a summary of Memorandum of Changes submitted by us to the branch management .
Memorandum of Changes (summary)
No. Increase Decrease
a. In respect of Income
b. In respect of expenditure
c. In respect of Assets
d. In respect of Liabilities
e. In respect of Gross NPAs
2
f. In respect of Provision on NPAs
g. In respect of Classification of
Advances
h. In respect of Risk Weighted
Assets
i. Other items (if any)
For ABC and Co.
Chartered Accountants
Signature
(Name of the Member Signing the Audit Report)
3
(Designation)
Membership Number
Firm registration number
Place of Signature
Date
1 Where applicable.
2 Applicable in cases where banks determine provision at Branch level.
3 Partner or proprietor as the case may be.”
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Keeping in view the requirements of the SA 700,705 and 706 issued by the ICAI, the following formats – D.2 (Pages 4-
6) for nationalized bank branches and D.4 (Pages for banking Companies are recommended and may be considered;
and the same may be modified for State Bank of India branches and those of its subsidiaries.

D.2
RECOMMENDED REPORT OF THE INDEPENDENT BRANCH AUDITOR TO THE STATUTORY AUDITORS
ON THE FINANCIAL STATEMENTS OF BRANCH OF BANK FOR THE YEAR 2017-18
FOR NATIONALISED BANKS

We have audited the accompanying financial statements of the _________________________, Branch of
____________ (Bank), which comprise the Balance Sheet as at 31.3.2018 and the Profit and Loss Account of
the said Branch for the year then ended, and other explanatory information.
1. Management’s Responsibility for the Financial Statements
Management of the Branch is responsible for the preparation of these financial statements that give a true and
fair view of the financial position and financial performance of the Branch in accordance with the Banking
Regulation Act 1949, and comply with applicable guidelines of the Reserve Bank of India and, (#except as
otherwise stated), with the Accounting Policies, to the extent applicable to the Branch. This responsibility includes
the design, implementation and maintenance of internal control relevant to the preparation of the financial
statements that are free from material misstatement, whether due to fraud or error.
2. Auditor’s Responsibility
a. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted
our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of
India. These Standards require that we comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
those risk assessments, the auditor considers internal control relevant to the preparation and fair
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the branch’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of the accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
b. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
3. Basis of qualified opinion:

(all matters to be given in italics or bold letters)
a. Change in the Accounting Policies and effect thereof at the Branch.
b. Basis of the qualifications that appear in the Memorandum of Changes (MOCs) as quantified,
individually and in the aggregate, that have effect on the assets, liabilities, income or expenditure
for the year.
c. Nature of the qualifications, where quantification is not possible at the branch.
d. Contingent liabilities and other off balance sheet items, being under/over stated.
Reasons for changes in the classification/ categorization of advances, having effect on:
i. provisions that are to be considered at Head Office on a centralized basis; and
ii. amounts accrued as income, that require to be derecognized or modified in respect of the branch.

D.2
4. Opinion
Subject to what is stated in Paragraph 3 above and the Memorandum of Changes summary of this is
given below,
Summary of Memorandum of Changes (MOCs)
In respect of No. Amount (Rs.)
Increase Decrease
a. Income
b. expenditure
c. Assets
d. Liabilities
e. Contingent Liabilities
f. Other items (if any)

g. Changes in Classification of
Advances:
i. Standard
ii. Sub Standard
iii. Doubtful
iv. Loss
h. Other changes in advances:
i. Secured
ii. Unsecured
iii. Covered by Bank / Govt.
Guarantee
i. Sectoral changes:
i. Priority Sector
ii Public Sector
iii Banks
iv Others
j. Effect of changes in classification
(if quantified)
i. Provisions
ii. Income recognition
k. Disclosures
i. Gross NPAs
ii. Risk Weighted Assets
l. Provision on NPAs
(Effect due to change in
classification)
m. Other items if any(Specify)
and having effect on the branch financial statements, in our opinion and to the best of our information and
according to the explanations given to us, and as shown by the books of the Branch and read with the
Accounting Policies of the Bank (to the extent made known to us and as applicable to the Branch), we have to
report that :
a) the Balance Sheet as at 31.3.2018 of the said Branch of the Bank, as authenticated by us, is a full and
fair Balance Sheet of the Branch containing the necessary particulars and is drawn up so as to exhibit a
true and fair view of the affairs of the Branch as at 31.3.2018.
@@
b) the Profit and Loss Account* authenticated by us, shows a true and fair view of the Profit / loss
of the Branch for the year ended 31.3.2018 (after adjustment of interest as per Head Office
Communications).
5. Report on Other Legal and Regulatory Matters
The Balance Sheet and the Profit and Loss account have been prepared in the formats recommended by the
Central / Head Office and disclose the information as may be necessary to conform to Forms 'A' and 'B'
respectively of the Third Schedule to the Banking Regulation Act, 1949.
Subject to the limitations of the audit indicated in Paragraph 3 above, and as required by the Banking Companies
@@@
(Acquisition and Transfer of Undertakings) Act, 1970/1980 , as applicable to the Branch, and subject to the
limitations of disclosures required therein, we report that:

D.2
(a) we have obtained all the information and explanations which, to the best of our knowledge and belief, were
necessary for the purposes of our audit and have found them to be satisfactory;
(b) the transactions of the Branch, which have come to our notice, have been within the powers of the Bank;
(c) the Balance Sheet and Profit and Loss Account* dealt with by this report are in agreement with the books of
account; and
(d) In our opinion, proper books of accounts as required by law have been kept by the branch, so far as appears
from our examination of those books.
6. Other Matters
Provisions / Adjustments relating to the branch, in respect of matters usually dealt
with at Central/Head Office, including in respect of:
i. Bonus, ex-gratia, and other similar expenditure and allowances to branch employees;
ii. Terminal permissible benefits to eligible employees on their retirement (including additional retirement
benefits), Gratuity, Pension, liability for leave encashment benefits and other benefits covered in terms of
‘AS 15 (Revised) – Employee Benefits’ issued by the Institute of Chartered Accountants of India;
iii. Arrears of salary/wages/allowances, if any, payable to staff;
iv. Staff welfare contractual obligations;
v. Old unreconciled / unlinked entries at debit under various heads comprising Inter branch/office Adjustments,
vi. **Depreciation on fixed assets;
vii. **effect of conversion of outstanding Branch balances in foreign exchange as per the system followed ;
viii. Auditors’ fees and expenses;
ix. Items in Suspense, clearing Differences, Credit Cards, Frauds/ vigilance cases involving claims/ liability or
loss to the Bank and other provisions on behalf of the Branches;
x. Provisions in respect of advances as per the applicable prudential norms and Guidelines of the Reserve
Bank of India (including incremental/accelerated provisions) and the Bank’s policy in line therewith
(including on standard advances, floating, ad-hoc/generic provisions covering weak standard advances);
xi. Provision for clearing difference and Sundry Assets outstanding, if any, long pending; and
xii. Taxation (subject to adjustments for deferred tax up to 31.3.2018).
(Also refer D.4 for illustrative observations, and to the extent of qualifications, these may be incorporated based
on audit evidence)
For_______________________
Firm Reg. No.____________
(Partner)
M. No.
Place:
Date:
# indicate , if applicable
* the term ‘Statement of Profit and Loss’ can also be used as decided by the Council of the ICAI in their meeting
held in January 2014.
** if centralised at Head Office
@ Refer Annexures for recommended formats of reporting, particularly the MOCs for matters affecting
the annual financial statements.
Notes:
@@
1. Delete what is inapplicable.
2. The concept of “materiality” needs to be kept in mind while reporting.
3. All qualifications must be in bold/italics.
4. Check whether there is any change in the Accounting Policies since the earlier year that needs to be
stated along with the effect thereof.
@@@
5. State 1970 or 1980 as applicable
6. Paras relating to Cash Flows Statements have not been incorporated here as these will be done by
the Main Auditors for the bank as a whole.

D.3
RECOMMEMDED FORM OF REPORT OF BRANCH AUDITOR TO THE STATUTORY AUDITORS ON THE
AUDIT OF ACCOUNTS OF ___________BRANCH OF (name of the Banking company) FOR THE YEAR
#
2017-18 (FOR BANKING COMPANIES)
We have audited the accompanying financial statements of the _________________________, Branch of

____________ (name of the Banking company) which comprise the Balance Sheet as at 31.3.2018 and the
Profit and Loss Account *of the said Branch for the year then ended, and other explanatory information.
1. Management’s Responsibility for the Financial Statements
Management of the Branch is responsible for the matters stated in Section 134(5) of the Companies Act, 2013
(“the Act”) with respect to preparation of these financial statements that give a true and fair view of the
financial position and financial performance of the Branch in accordance with the accounting principles
generally accepted in India, including the Accounting Standards specified under section 133 of the Act, read
with Rule 7 of the Companies (Accounts) Rules, 2014 and provisions of Section 29 of the Banking Regulation
Act, 1949 . This responsibility also includes maintenance of adequate accounting records in accordance with
the provisions of the Act for safeguarding of the assets of the Branch and for preventing and detecting frauds
and other irregularities; selection and application of appropriate accounting policies, making judgments and
estimates that are reasonable and prudent; and design, implementation and maintenance of internal financial
controls, that were operating effectively for ensuring the accuracy and completeness of the accounting
records, relevant to the preparation of the financial statements that give a true and fair view and are free from
material misstatement, whether due to fraud or error.
2. Auditor’s Responsibility
a. Our responsibility is to express an opinion on these financial statements based on our audit. We have taken
into account the provisions of the Act, the accounting and auditing standards and matters which are
required to be included in the audit report under the provisions of the Act and the Rules made thereunder.
We conducted our audit in accordance with the Standards on Auditing (“the Standards”) specified under
section 143(10) of the Act. Those Standards require that we comply with ethical requirements and plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free
from material misstatement.
b. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
those risk assessments, the auditor considers internal control relevant to the Bank’s preparation and fair
circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of the accounting estimates made by the Management of the Branch, as well as evaluating
the overall presentation of the financial statements.
c..We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
3. Basis of qualified opinion:

(all matters to be given in italics or bold letters)
a. Change in the Accounting Policies and effect thereof at the Branch.
b. Basis of the qualifications that appear in the Memorandum of Changes (MOCs) as quantified,
individually and in the aggregate, that have effect on the assets, liabilities, income or expenditure
for the year.
c. Nature of the qualifications, where quantification is not possible at the branch.
d. Contingent liabilities and other off balance sheet items, being under/over stated.
Reasons for changes in the classification/ categorization of advances, having effect on:
i. provisions that are to be considered at Head Office on a centralized basis; and
ii. amounts accrued as income, that require to be derecognized or modified in respect of the branch.

4. Opinion D.3
Subject to what is stated in Paragraph 3 above and the Memorandum of Changes summary of which is
given below,
Summary of Memorandum of Changes (MOCs)
In respect of No. Amount (Rs.)
Increase Decrease
a. Income
b. expenditure
c. Assets
d. Liabilities
e. Contingent Liabilities
f. Other items (if any)

g. Changes in Classification of
Advances:
i.Standard
ii.Sub Standard
iii.Doubtful
iv.Loss
h. Other changes in advances:
i.Secured
ii.Unsecured
iii. Covered by Bank / Govt.
Guarantee
i.Sectoral changes:
i. Priority Sector
ii Public Sector
iii Banks
iv Others
j. Effect of changes in classification (if
quantified)
i. Provisions
iii. Income recognition
k. Disclosures
i. Gross NPAs
ii. Risk Weighted Assets
l. Provision on NPAs
(Effect due to change in classification)
m.Other items if any(Specify)
a) the Balance Sheet as at 31.3.2018 of the said Branch of the Bank, as authenticated by us, is a full and fair
Balance Sheet of the Branch containing the necessary particulars and is drawn up so as to exhibit a true and
fair view of the affairs of the Branch as at 31.3.2018.
@@
b) the Profit and Loss Account* authenticated by us, shows a true and fair view of the profit / loss
of the Branch for the year ended 31.3.2018 (after adjustment of interest as per Head Office Communications).
5. Other Legal and Regulatory Matters
The Balance Sheet and the Profit and Loss Account* have been prepared in the formats recommended by the
Central / Head Office and disclose the information as may be necessary to conform to Forms 'A' and 'B'
respectively of the Third Schedule, as per section 29 of the Banking Regulation Act, 1949, read with section
133 of the Act and Rule 7 of the Companies (Accounts) Rules, 2014 and , except as otherwise stated, comply
with the applicable Accounting Standards.

D.3
Subject to the limitations of the audit indicated in Paragraph 3 above, as applicable to the Branch, and subject to
the limitations of disclosures required therein, we report that:
(a) we have obtained all the information and explanations which, to the best of our knowledge and belief, were
necessary for the purposes of our audit and have found them to be satisfactory.
(b) the transactions of the Branch, which have come to our notice, have been within the powers of the Bank.
6. Further, as required by section 143(3) of the Act, we further report that:

a. we have sought and obtained all the information and explanations which to the best of our knowledge and belief
were necessary for the purpose of our audit;
b. in our opinion, proper books of account as required by law have been kept by the branch so far as appears from
our examination of those books;
c. the Balance Sheet and the Profit and Loss account* dealt with by this report are in agreement with the books
of account;
d. in our opinion, the aforesaid standalone financial statements comply with the Accounting Standards specified
under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules, 2014, to the extent they are
not inconsistent with the accounting policies prescribed by RBI;
e. with respect to the adequacy of the internal financial controls over financial reporting of the Branch and the
operating effectiveness of such controls, refer to our separate Report in “Annexure A”.
f.with respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of the
Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to
the explanations given to us:
(a) the Branch has disclosed the impact of pending litigations on its financial position in its financial
statements -Refer Schedule XX -Note XX to the financial statements; (or the Branch does not have any
##
pending litigations which would impact its financial position )
(b) the Branch has made provision, as required under the applicable law or accounting standards, for
material foreseeable losses, if any, on long-term contracts including derivative contracts -Refer Schedule
XX -Note XX to the financial statements; (or the Branch did not have any long-term contracts including
##
derivative contracts for which there were any material foreseeable losses ) and
(c) there has been no delay in transferring amounts, required to be transferred, to the Investor Education and
Protection Fund by the Branch (or, following are the instances of delay in transferring amounts, required to
be transferred, to the Investor Education and Protection Fund by the Branch or there were no amounts
##
which were required to be transferred to the Investor Education and Protection Fund by the Branch ).
7. Other Matters
Provisions / Adjustments relating to the branch, in respect of matters usually dealt with at Central/Head Office,
including in respect of:
i. Bonus, ex-gratia, and other similar expenditure and allowances to branch employees;
ii.Terminal permissible benefits to eligible employees on their retirement (including additional retirement
benefits), Gratuity, Pension, liability for leave encashment benefits and other benefits covered in terms of
‘AS 15 (Revised) – Employee Benefits’ issued by the Institute of Chartered Accountants of India;
iii. Arrears of salary/wages/allowances, if any, payable to staff;
iv. Staff welfare contractual obligations;
v. Old unreconciled / unlinked entries at debit under various heads comprising Inter branch/office
Adjustments,
vi. **Depreciation on fixed assets (including adjustments, if and to the extent, required as per Schedule –II to
the Act, based on the useful life of the assets);
vii. **effect of conversion of outstanding Branch balances in foreign exchange as per the system followed ;
viii. Auditors’ fees and expenses;

D.3
ix. Items in Suspense, clearing Differences, Credit Cards, Frauds/ vigilance cases involving claims/ liability or
loss to the Bank and other provisions on behalf of the Branches;
x. Provisions in respect of advances as per the applicable prudential norms and Guidelines of the Reserve
Bank of India (including incremental/accelerated provisions) and the Bank’s policy in line therewith
(including on standard advances, floating, ad hoc/generic provisions covering weak standard advances) ;
xi. Provision for clearing difference and Sundry Assets outstanding, if any, long pending; and
xii. Taxation (subject to adjustments for deferred tax up to 31.3.2018).
(Also refer D.4 for illustrative observations, and to the extent of qualifications, these may be incorporated based
on audit evidence)
For_______________________
Firm Reg. No. __________
(Partner)
M.No…………
Place:
Date:
_
* the term ‘Statement of Profit and Loss’ can also be used as decided by the Council of the ICAI in their meeting
held in January 2014.
** if centralised at Head Office
## Applicable in cases where banks determine provision at Branch level.
@ Refer Annexures for recommended formats of reporting, particularly the MOCs for matters affecting
the annual financial statements.
Notes:
@@
1 Delete what is inapplicable.
2. The concept of “materiality” needs to be kept in mind while reporting.
3. All qualifications must be in bold/italics.
4. Check whether there is any change in the Accounting Policies since the earlier year that needs to be
stated along with the effect thereof.
5. Paras relating to Cash Flows Statements have not been incorporated here as these will be done by the
Main Auditors for the bank as a whole.
____________________________________________________________

D.3
Annexure A to the independent auditor’s report of even date on the financial statements of _____ Branch of
______Bank Limited
Report on the Internal Financial Controls under Clause (i) of Sub-section 3 of Section 143 of the Act
1. We have audited the internal financial controls over financial reporting of ____Branch of ______ Bank Limited
(‘the Branch’) as at 31.03.2018 in conjunction with our audit of the financial statements of the Branch for the year
ended on that date.
Management’s Responsibility for Internal Financial Controls

2. The Management of the Branch is responsible for establishing and maintaining internal financial controls based
on _____ [for example, “the internal control over financial reporting criteria established by the Branch considering
the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls
Over Financial Reporting (‘the Guidance Note”) issued by the Institute of Chartered Accountants of India (‘the
ICAI”)”.] These responsibilities include the design, implementation and maintenance of adequate internal financial
controls that were operating effectively for ensuring the orderly and efficient conduct of its business, including
adherence to Branch’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors,
the accuracy and completeness of the accounting records, and the timely preparation of reliable financial
information, as required under the Act.
Auditor’s Responsibility
3. Our responsibility is to express an opinion on the Branch’s internal financial controls over financial reporting based
on our audit. We conducted our audit in accordance with the Guidance Note and the Standards on Auditing (‘the
Standards’), issued by the ICAI and deemed to be prescribed under section 143(10) of the Act, to the extent
applicable to an audit of internal financial controls, both issued by the ICAI. Those Standards and the Guidance
Note require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether adequate internal financial controls over financial reporting was established and
maintained and if such controls operated effectively in all material respects.
4. Our audit involves performing procedures to obtain audit evidence about the adequacy of the internal financial
controls system over financial reporting and their operating effectiveness. Our audit of internal financial controls
over financial reporting included obtaining an understanding of internal financial controls over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. The procedures selected depend on the auditor’s
judgement, including the assessment of the risks of material misstatement of the financial statements, whether
due to fraud or error.
5. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion on the Branch’s internal financial controls system over financial reporting.
Meaning of Internal Financial Controls Over Financial Reporting

6. A branch’s internal financial control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A branch’s internal financial control over
financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the branch;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the branch are being made only in accordance with authorizations of management and directors of the bank;
and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the branch’s assets that could have a material effect on the financial statements.

D.3
Inherent Limitations of Internal Financial Controls Over Financial Reporting
7. Because of the inherent limitations of internal financial controls over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may occur
and not be detected. Also, projections of any evaluation of the internal financial controls over financial reporting to
future periods are subject to the risk that the internal financial control over financial reporting may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Opinion
8. In our opinion, the Branch has, in all material respects, an adequate internal financial controls system over
financial reporting and such internal financial controls over financial reporting were operating effectively as at
31.03.2018, based on ______ [for example, “the internal control over financial reporting criteria established by the
Branch considering the essential components of internal control stated in the Guidance Note issued by the ICAI”].
For_______________________
Firm’s Reg. No. __________
(Partner)
M.No…………
Place:
Date:

D.4
ILLUSTRATIVE AUDIT OBSERVATIONS REFERRED TO IN THE FORM OF REPORT OF THE BRANCH

AUDITOR TO THE STATUTORY AUDITORS ON THE AUDIT OF ACCOUNTS OF THE BRANCH FOR THE
YEAR ENDED 31.03.2018
S. No. ILLUSTRATIVE AUDIT OBSERVATIONS Schedule
1. There are unreconciled differences between the control accounts and the
subsidiary records
2. Deposits:
a) Overdue/matured Term Deposits amounting to Rs.________ continue to
be included under “Term Deposits” instead of the same being treated as
“Demand Deposits” as per the disclosure requirements.
b) Interest provision of Rs._________ made at the Branch since the date of
its last application to various Savings Bank Deposits, in our view,
comprises “Interest Accrued and due” rather than “Interest Accrued but
not due”, and considering the nature thereof, should form part of Deposits
under the sub-head “Savings Bank Deposits.”
c) Interest has not been provided on current deposits till the year-end in
respect of:
- deceased constituents (from the date of death)
- RRBs
d) Interest on Overdue/matured Deposits required to be provided up to the
year-end has been wrongly provided in excess/short by Rs.________.
e) Interest has not been provided/short provided/excess provided on various
other deposits to the extent of Rs._______ (Net)
3. Interest on Advances:
a) Interest has been excess/short charged on Advances to the extent of
Rs……….(Net)
b) Interest income has been recovered out of fresh facilities in NPAs, to the
extent of Rs.________, contrary to the prudential norms of the Reserve
bank of India.
4. Advances:
On the basis of our examination of the Advances accounts we observe that:
a) Advances have not been classified as per the prudential norms, having
effect on provisioning and income recognition as under:
- Accounts classified as Standard should have been in the Sub-Standard
category.
- Income accrued on the above needs to be:
 derecognised to the extent of Rs.__________ (being interest
accrued up to the previous year-end not realized till the year-end).
 reversed and not recognised for the year under audit to the extent
of Rs._______
Income reversal would have corresponding effect on Interest Suspense to the
extent of Rs.___________:and correspondingly income and advances would
get reduced to the extent of Rs………. In the accounts of the Branch.
- Accounts classified as Sub-Standard need to be classified as in
 Doubtful category.
 Loss category
b) Recoveries in NPAs have not been appropriated to revenue where such
recoveries are in excess of “Interest Suspense”;
Advances and Income have been accordingly understated to the extent of
Rs.__________
c) While classifying the restructured accounts in the sub-standard category,
the existing facilities comprising NPAs prior to restructuring have been
wrongly categorized as “Standard”, contrary to the applicable RBI
Guidelines.
D.4

d) Sub-standard Accounts where restructuring / rehabilitation was allowed

but default continued for one year thereafter or in which there was no
satisfactory performance, have been wrongly classified as “Standard” to
the extent of Rs. _________
e) The branch continues to grant / issue fresh L/Cs to certain parties,
notwithstanding that earlier ones have devolved. Devolved L/Cs in default
for a period of over 90 days amount to Rs._________
Provision on these on the basis of the Borrower’s classification needs to be
considered at Head Office.
f) Due to the system followed for appropriation of recoveries in NPAs,

accounts have been reclassified as Standard without recoveries being
made in respect of unapplied/unrealized interest. Such Accounts need to
be downgraded to NPAs till so long as there is unrealized income
including on account of ‘Right of Recompense’ and ‘unapplied interest’.
Due to this, there is change in classification, affecting provisioning and income
to the extent of Rs._______
g) Unapplied Interest has not been computed upto the year-end in NPAs at
the applicable contractual rates for the time being in force; the records of
the Bank are incomplete on this account.
On account of this, the interest is short waived by Rs.____________ in
accounts compromised/settled.
5. Commission on Govt. business

In respect of Govt. business done upto the year-end, income to the extent of
Rs.________ has not been accrued up to the year end at the Branch.
6. Locker rents and Commission

The Bank has accounted on cash basis, income by way of Locker rents and
Commission, contrary to the concept of accrual, one of the basic accounting
assumptions as per AS I of ICAI. The amount of the same and the amount
accrued upto the year-end, have not been computed at the Branch.
7. Reconciliation of Accounts with other Banks

a) Bank confirmation certificates have not been made available in respect of
balances with banks.
b) Adjustments are required to be made in respect of entries arising in bank
reconciliation statements
 as affecting other heads of accounts upto the year-end
 as affecting expenditure / income items
8. Fixed Assets
a) Capitalisation has not been made in respect of assets acquired upto the
year-end to the extent of Rs._______.Advances against such assets
amount to Rs._____
b) Depreciation has been excess / short provided at the Branch to the extent
of Rs.__________ .
c) Renovation expenses at the Branch have been wrongly capitalized,
although amounts aggregating to Rs._____________ pertain to Repairs
and Maintenance.

D.4

9. Other Assets
a) Provision has not been made in respect of expenditure incurred up to the
year-end, including non-adjustment of advances there against to the extent
of Rs.________ (Annexure___)
b) In respect of old/unadjusted/unexplained entries outstanding in “Other
Assets”/suspense, provision is recommended at Rs.________
10. Guarantees, L/Cs

a) Obligations under Letters of Comfort, amounting to Rs.______ have not
been considered as part of Contingent Liabilities as at the year end.
b) Expired Guarantees and L/Cs where the claim period has expired and
obligations have been confirmed as ceased, continue to be on the record
of the Branch to the extent of Rs.________.
11. There are claims against the Bank at the branch level which have not been
disclosed to the extent of Rs.________.
12. Foreign Currency balances
Outstanding balances of items expressed in foreign currencies have not been
converted and restated at the applicable year-end rates of exchange.
13. Inter branch Adjustments (HO balance :Rs._________)
Effect needs to be given to known entries originated prior to the year-end but
responded after that date till the completion of the audit at the Branch.
Statements (Daily HO summaries) have not been forwarded for matching of entries
to the Central Reconciliation cell.
Entries at debit outstanding under various sub heads since over 6 months as at
31.3.2017 and remaining unadjusted require to be provided for to the extent of
Rs.________.
14. Bills for Collection

These include old entries (over six months old) amounting to Rs.________
reasons for retention of which remain unexplained at the Branch.
15. Rebate on Bills Discounted

Adjustments have not been made to the extent of Rs.__________ in respect of
rebate on bills discounted for income attributable to the period beyond the year-
end.
16. INFORMATION SYSTEM/ EDP AUDIT
We are informed that the reports of the Information System audit, if any, conducted by
Head Office are not available at the Branch, to ascertain whether there are any issues and
matters that need to be addressed by the Bank in connection with its Branch financial
statements, particularly, as regards coverage of all the applicable RBI parameters and
norms/guidelines , including those related to the classification of advances for the purposes
of income recognition and provisioning etc. The Branch management has represented that
all the accounting norms as well as the parameters required by the Regulator have been
built into the system by the Head Office in relation to the Branch financials and that the
Branch financials/data is in consonance therewith. At the Branch, reliance has been placed
on the system generated information/data in the computerized environment based on the
CBS system laid down by the Bank, particularly as to the originating evidence of
transactions and recordings that are not with the Branch.”
(Memorandum of Changes for the above, have been included in Annexure____)

BANK AUDIT 2017-18 - ILLUSTRATIVE MANNER OF REPORTING D.4
Background:
A whole lot of system generated information is handed over to the auditors and
the branch management does not know whether all the parameters applicable
and effective in respect of the branch have been built in. If enquiries show that
they do not have information and no validation has been done, it is appropriate
to mention the following in the report.
“INFORMATION SYSTEM/ EDP AUDIT
We are informed that the reports of the Information System audit, if any, conducted by Head
Office are not available at the Branch, to ascertain whether there are any issues and matters
that need to be addressed by the Bank in connection with its Branch financial statements,
particularly, as regards coverage of all the applicable RBI parameters and norms/guidelines
, including those related to the classification of advances for the purposes of income
recognition and provisioning etc. The Branch management has represented that all the
accounting norms as well as the parameters required by the Regulator have been built into
the system by the Head Office in relation to the Branch financials and that the Branch
financials/data is in consonance therewith. At the Branch, reliance has been placed on the
system generated information/data in the computerized environment based on the CBS
system laid down by the Bank, particularly as to the originating evidence of transactions and
recordings that are not with the Branch.”
Change in the Accounting Policies and effect thereof
Background:
Banks have resorted to the practice of appropriating recoveries in NPA (where
there are no instructions to the contrary from the borrower), to the principal
dues in priority to the revenue, that was postponed when the account became
NPA. The accounting policies of the banks have undergone a change, thereby
impacting the revenue accordingly.
This can be considered for reporting as under:
We observe that there has been a change in the policy on Revenue Recognition with
regard to accounting of recoveries in NPA Accounts with effect from ________, the
relevant accounting policy being reproduced below:
(“………….”)
The order of appropriation of recoveries in non-performing accounts does not appear
to be justified and is not in line with the regulatory Guidelines / Instructions (refer Para
3.3 of the RBI Master Circular No. DBR.No.BP.BC.2/21.04.048/2015-16 dated 1-7-2015),
reproduced as under:
‘’ 3.3 Appropriation of recovery in NPAs
3.3.1 Interest realised on NPAs may be taken to income account provided the
credits in the accounts towards interest are not out of fresh/ additional credit
facilities sanctioned to the borrower concerned.
3.3.2 In the absence of a clear agreement between the bank and the borrower for the
purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest
due), banks should adopt an accounting principle and exercise the right of
appropriation of recoveries in a uniform and consistent manner.”
As per Para 3.3.1 the recoveries, by way of Interest in all NPA accounts are to be
taken to Income Account, except where the recoveries are out of further /fresh
facilities sanctioned to the borrower.
As regards appropriation in NPAs where the borrower gives instructions as
regards appropriation of the credit towards principal or interest it has been
clarified in Para 3.3.2 above that the appropriation cannot be done at the
discretion of the Bank. Only in cases where there are no instructions
(agreement between the bank and the borrower), the bank is entitled to
exercise its right of appropriation “in a uniform and consistent” manner. The
discretion of the Management can be exercised keeping in view the accepted
accounting principles.

It will be appreciated that the uniform and consistent manner has to be in

consonance with adoption of an accounting principle, which must be logical
and appropriate. In this connection your attention is drawn to the following
paras of the relevant Accounting Standard (AS 9 - Revenue Recognition),
Effect of Uncertainties on Revenue Recognition
Para 9.1 Recognition of revenue requires that revenue is measurable and that
at the time of sale or the rendering of the service it would not be
unreasonable to expect ultimate collection.
Para 9.2 Where the ability to assess the ultimate collection with reasonable
certainty is lacking at the time of raising any claim, e.g., for escalation of
price, export incentives, interest etc., revenue recognition is postponed to
the extent of uncertainty involved. In such cases, it may be appropriate to
recognise revenue only when it is reasonably certain that the
ultimate collection will be made. Where there is no uncertainty as to ultimate
collection, revenue is recognised at the time of sale or rendering of service
even though payments are made by installments.
Para 9.3 When the uncertainty relating to collectible arises subsequent to the
time of sale or the rendering of the service, it is more appropriate to make a
separate provision to reflect the uncertainty rather than to adjust the amount
of revenue originally recorded.
Para 9.4 An essential criterion for the recognition of revenue is that the
consideration receivable for the sale of goods, the rendering of services or from the
use by others of enterprise resources is reasonably determinable. When such
consideration is not determinable within reasonable limits, the recognition of
revenue is postponed.
Para 9.5 When recognition of revenue is postponed due to the effect of
uncertainties, it is considered as revenue of the period in which it is properly
recognized.
Para 13. Revenue arising from the use by others of enterprise resources yielding
interest, royalties and dividends should only be recognised when no significant
uncertainty as to measurability or collectability exists. These revenues are
recognised on the following bases:
(i) Interest : on a time proportion basis taking into account the amount
outstanding and the rate applicable.
(ii) The relevant principle of revenue recognition is embedded in the
Accounting Standard, in that revenue, to the extent it is uncertain of
realization or collection, when normally due under the accrual method
of accounting, is postponed and is considered as revenue of the
period in which the uncertainty ceases to exist. Such postponed
revenue becomes income of the year when realized. This equally
applies to interest contractually accruing but not realized in respect
of advances that are identified as non-performing assets. The
postponed revenue when recorded on realization, cannot logically be
considered as towards the principal, nor can it be considered that the
‘cash method’ of accounting has been followed for such postponed
revenue of the earlier periods.
It will be observed that the policy of the Bank is inappropriate and not in line
with the accepted principles of accounting. This can have serious
implications, as:
i. The accounting policy change is not as per the mandatory Accounting
Standard issued by the Institute of Chartered Accountants of India (ICAI); and
disclosing an inappropriate or wrong accounting policy, will not purge the
accounts of the defects therein; and

ii. Taxation Authorities may not accept the change from a recognized and uniformly
followed method of accounting to that not considered to be in consonance with the
accepted principles, affecting Provision for Taxation, as well as Deferred Tax as
per AS 22 issued by ICAI.
For the year, the effect of the change in policy will have to be computed and
disclosed, by culling out, at the branches, the figures of recovery in NPAs that
have been recorded as the recovery of principal rather than interest income.
BACKGROUND RELATING TO DEPOSITS PORTFOLIO AND SUGGESTED MANNER OF

REPORTING (FACTS ASSUMED)
A. Background
Disclosure of the amount in the Balance Sheets of banks- Interest Accrued
 and due ) Term Deposits, including FCNR(B) deposits
 and not due ) Savings Bank Deposits
Interest accrued and not due on Term Deposits is to be shown as Other Liabilities
in Schedule 5, in respect of deposits that are contractually not matured and in
respect of which there are no instructions to prematurely encash the deposit.
(Refer Notes and Instructions for preparation of accounts issued in RBI Circular
No.DBOD.No.BP.BC.78/C.686/1991-92 dated 6th February 1992)
Interest accretion as a provision till it is due (whether or not applied to the
depositors’ accounts as per the internal convenient procedure of the bank), but if
due it forms part of the Deposits. Credit or payment, whichever is earlier will also
attract TDS as applicable. On maturity and renewal, the same is to be done net of
TDS.
Interest accrues on FCNR(B) deposits, but is not due till the deposits mature for
payment, and cannot form part of the deposits.
Interest on Savings bank Deposits accrue on daily basis and are contractually due
at any time, even though not applied.
Based on facts examined, the following is the illustrative manner of reporting in the
Main Report
Interest Accrued and Due and Interest Accrued but not Due on Deposits:
We observe that as per the past practice and system followed, interest
accrued (as computed by the system), on term deposits that are not yet
matured, is included in and treated as part of the Deposits portfolio of the
Bank, although the same is not due. In respect of interest accrued and due
but not applied on Savings Bank Accounts, the same is included as part of
Other Liabilities. Attention is drawn to the Notes and Instructions in this
regard that have been issued by the Reserve Bank of India (RBI), pursuant
to its Circular No.DBOD.No.BP.BC.78/C.686/1991-92 dated 6th February
1992, prescribing the form and contents of the Bank Balance Sheet and
these suggest the following disclosure requirements that are appropriate:
 Interest accrued and due on Deposits is required to be included and
shown as part of the Deposits portfolio of the Bank in “Schedule 3 -
Deposits ” in the Balance Sheet; and
 Interest accrued but not due on Deposits, is required to be included
and shown as part of “ Interest Accrued” in Schedule 5 –Other
Liabilities and Provisions.
On the basis of the above, the Bank needs to consider the grouping of the
interest accrued and “due” and that “not due” for appropriate disclosure in
the Balance Sheet.
This action needs to be considered for the Bank as a whole and no MOC is
being suggested at the Branch level.

B. Background:
Provision for Interest has to be made at Savings Bank rate for the time being in
force on Unclaimed /Unpaid Deposits, particularly on old deposits outstanding
since the introduction of the scheme for auto renewal of deposits. This will
include in respect of deceased depositors. Liability is to be segregated between
this year and earlier years.
Based on facts, the following may be the manner of reporting in the Main Report:
Interest on Unclaimed/Unpaid deposits:
In terms of Para 3.4 of the RBI Master Circular DBR.No.Dir.BC.7/13.03.00/2015-
16 dated 1-7-2015, Provision for Interest at Savings Bank rate for the time being
in force, has not been made in the accounts on Unclaimed /Unpaid Deposits,
particularly on old deposits outstanding since the introduction of the scheme for
auto renewal of deposits (including in respect of deceased depositors).
Such provision amounts to Rs._______(including Rs.________) pertaining
to the earlier years.
C. Background:
Issuance of Fixed Deposit Receipts in physical form for all deposits and in
cancellation of the expired, but automatically renewed deposits, pursuant to RBI
Directives
(Para 3.21 of the RBI Circular DBR.No.BC.7/13.03.00/2015-16 dated 1-7-2015 (not
repealed by the Master Direction DBR.Dir.No.84/13.03.00/2015-16 dated 3-3-2016)
re: Issue of term deposit receipt, which requires that a bank should issue term deposit
receipt indicating therein full details, such as, date of issue, period of deposit, due
date, applicable rate of interest, etc.). The Para is reproduced hereunder:
“3.21 Issue of term deposit receipt
(a) A bank should issue term deposit receipt indicating therein full details, such as,
date of issue, period of deposit, due date, applicable rate of interest, etc.
(b) It has been observed that Scheduled Commercial Banks, during the course of
acting as Professional Clearing Members of Stock Exchanges/ Clearing
Corporations, issue own Fixed Deposit Receipts with zero percent interest as
security in favour of the Clearing Corporations. In this connection, it is advised that
a Term Deposit Receipt (TDR)/ Fixed Deposit Receipt (FDR) is acknowledgement
for a deposit received by a bank for a fixed term which is withdrawable only after
the expiry of the said fixed period. A bank issues TDR indicating therein full details,
such as date of issue, period of deposit, due date, applicable rate of interest etc. As
such, issue of TDR/ FDR without a corresponding term deposit/ fixed deposit
account in the books of the bank is not in order and will amount to violation of the
extant guidelines on acceptance of deposits. The rate of interest payable on such
deposits would be subject to the extant guidelines on ‘Interest Rates on Rupee
Deposits’.
As per Para 3.7 re: Payment of interest on Term Deposit Accounts of customers
frozen by the orders of the enforcement authorities, however, no new receipt is
required to be issued but a suitable note should be made regarding renewal in the
deposit ledger; and renewal of deposit should be advised by registered letter /
speed post / courier service to the concerned Government department under
advice to the depositor.
Control over credits comprising term deposits- a risk prone area:

 Where receipts are not issued in physical form on maturity, in cancellation of
the old ones.
 Where receipts are issued bit not delivered/dispatched to the depositors
 Where endorsements are made on the inverse of the existing receipts to renew
them and adequacy of records/evidence thereof.
(This is a risk prone area and must be brought to the notice of the Management -

Suggested report para in the LFAR:

TERM DEPOSIT RECEIPTS:
The Bank has a system of renewing term deposits suo moto for the same period and
at the rates for the time being in force on the date(s) of renewal (based on the
conditions stipulated at the time of issuance of the original deposit), by reversal of
the book entries automatically on the date(s) of maturity of the deposits. Other than
generating an advice, the Bank does not issue receipts in physical form (indicating
therein, full details such as date of issue, period of deposit, due date, applicable rate
of interest etc, as required in terms of Para 3.21 of the RBI Circular
DBR.No.Dir.BC.7/13.03.00/2015-16 dated 1-7-2015), except where not so required in
case of accounts frozen by authorities (refer Para 3.7 of the said circular).
Inadequate/ loss of control over book credits comprising DEPOSITS is risk/fraud
prone area, where Deposit receipts are not issued on receipt/renewal of deposits or
where endorsement on the inverse of the existing matured deposit receipts is made;
as absence/inadequacy of the controls may lead to misuse of such credits.
In our view the Term Deposit Advice issued by the Bank cannot be treated as akin to
the requirements of issue of the formal Term Deposit Receipt, normally issued with
control aspects, including issuance on security paper stationery. We observe that
the Bank has the practice of marking lien on such advices relating to term deposits
while granting loans to depositors, rather than obtaining discharged Deposit receipts
to be lien marked and held as part of the documents. This practice needs to be
discouraged. At the Branch there were loans aggregating to Rs.________ against
such lien marked advices, treated as part of the documentation.
The issuance of the advise to depositors is not tantamount to compliance of the said
RBI circular; and we recommend that the bank instructs the branches for a full and
faithful compliance thereof; and hold, as part of documentation, duly discharged and
lien marked formal term deposit receipts, where loans are granted against the same.
D. Margin Money against Letters of Credit and Bank Guarantees:
Background:
As per Notes and Instructions given by the Reserve Bank of India (RBI), pursuant
to its Circular No.DBOD.No.BP.BC.78/C.686/1991-92 dated 6th February 1992,
prescribing the form and contents of the Bank Balance Sheet cash margins for
issuance of LCs and guarantees, should be shown as part of Other Liabilities and
not as deposits.
The following is recommended in the Main Report:
Margin Money against Letters of Credit and Bank Guarantees:

“ Margin money held as deposits for issue of Letters of Credit (Rs.
______) and Bank Guarantees (Rs.___________) are considered as a part
of deposits, instead of ‘Other Liabilities and Provisions’.
MOC has been recommended for the same”.
E. Current Accounts/Advances
Background:
Where the regional/Zonal or other controlling offices/ Centralised Credit Cells
maintain an account with a branch they usually operate that account by issuance
of cheques issued for expenditure etc. of that office. In such cases the amounts
in the current account at debit maintained at the branch are really of the nature
of Inter office adjustments for the bank as a whole.

The following should be incorporated in the Main Report:
“The debit balance in the current accounts aggregating to Rs._________
shown as due from ________ office of the Bank, wrongly shown as part of
the advances portfolio, are of the nature of Inter Office Adjustments and
need to be shown as such. MOC has been recommended for the same”.
LETTERS OF COMFORT FOR TRADE CREDITS:

Background:
Letters of Comfort in relation to Trade Credits for imports into India

Besides issuing guarantees to borrowers as part of the facilities, there is an
increasing tendency for banks to issue “Letters of Comfort” on behalf of the
borrowers; and such letters constitute the banks’ obligation akin to a guarantee,
to be normally reflected as an off balance sheet disclosure.
It is imperative to determine, based on the intrinsic nature of the related
documents, as to whether such letters of comfort comprise liabilities funded by
or on account of the bank, particularly in “buyers’ trade arrangements” where the
bank itself requests for loan funds for specified periods at interest, from its
overseas correspondent banks (including SBI in case of the associated banks)
and the moneys are routed through the bank’s NOSTRO accounts and
disbursed to the suppliers overseas on behalf of the bank’s borrower . The bank’s
constituent (with whom there is privity of contract), gets funded for acquisition it
makes (of supplies) from the overseas vendor.
A thorough review of the documents comprising Letters of Comfort needs

to be made to determine if, intrinsically, it is suggestive of a funded
liability as opposed to a non funded obligation, particularly when there is
request for transfer of funds to the designated Nostro bank accounts
overseas, intended to discharge of the Bank’s constituents’ obligations
under the buyers’ credit facilities. The requisition from the bank, based on
the Letter of Undertaking and the corresponding acknowledgement of the
responding bank may logically suggest the funding of the transaction. As
per the laid down system, the Bank in India also acknowledges, through a
standard confirmation, the debt owed to the overseas bank.
It needs to be determined as to whether in the manner of structuring of the

documents and the intrinsic nature of the transactions for the Bank’s
constituents, the element and possibility of funding on behalf of the Bank, exists
and may not be ruled out. The matter has to be viewed in the light of “substance
over form”. In case this is akin to borrowing of funds overseas, it has implications
on the disclosure requirements in the Bank’s balance sheet and would clearly
have effect on the working of the Capital Adequacy Ratio.
Some banks may not even pass an entry with regard to the entries routed
through the NOSTRO account, for the funding received for onward transmission
of the funds to the overseas supplier of the Indian buyer.
RBI MAINTAINS THAT THESE HAVE NO ENFORCEABILITY, ALTHOUGH VIDE ITS
EARLIER CIRCULAR (4-3-2008) IT HAS INSISTED THAT THE BANKS NEED TO
ENSURE THEIR LEGAL ENFORCEABILITY, while framing their policy in this regard.

Illustratively, the Main Report can be on the following lines at the Branch
level
Letters of Undertaking/Letters of Comfort

We observe that the branch has opened Import LCs (for USD _______), for their
customers as per details in Annexure___ The related bills were received against the
LC with due dates and Buyer’s credit was availed from various overseas bankers, on
letters of request and based on Letters of Undertaking favouring the overseas banks.
The related amounts payable to the overseas suppliers have been routed through the
Bank’s NOSTRO Accounts at the request of the Bank for a loan, repayable after the
stipulated period with interest as agreed, without any deductions.
A prima facie review of the documents comprising Letters of Comfort is suggestive of a

loan with stipulated rates of interest payable at a point of time, by request for transfer
of funds to the Bank’s designated NOSTRO bank account overseas, from which
corresponding payment has been made to the overseas supplier in discharge of the
Bank’s constituents’ obligations under the buyers’ credit facilities. The
acknowledgement of the responding bank also suggests the funding of the transaction.
Going by the manner of structuring of the documents and the intrinsic nature of the
transactions for the Bank’s constituents, the element and possibility of funding on
behalf of the Bank, may not be ruled out. The matter has to be viewed in the light of
“substance over form”. In case this is akin to borrowing of funds overseas, it has
implications on the disclosure requirements in the Bank’s balance sheet and would
clearly have effect on the working of the Capital Adequacy Ratio.
The branch is submitting returns, which contain necessary details of the Letters of
Comfort/ Letters of Undertaking issued by the branch. As per the practice of the Bank,
the amount of Letters of Comfort/ Letters of Undertaking issued on behalf of the
constituents is disclosed under contingent liabilities while drawing up the financial
statements of the Bank, at Head Office.
We are of the opinion, that the above matter needs an in depth review at the apex
level, to determine the intrinsic nature of the transactions and balances, in the
light of the documentation and the same being recorded and disclosed
appropriately in the Bank’s financial statements; and accordingly, at the Branch
level no MOC is being recommended.
CASES OF QUICK MORTALITY WHERE ADVANCES BECAME NPA WITHIN 24 MONTHS OF

SANCTION/ APPRAISAL (Cases above Rs.10.00 lacs)
This, prima facie, reflects deficiencies in and faulty appraisal of the proposals,
including on account of technical and financial viability not having been properly
assessed or examined.
Based on a study of such cases, the causa proxima of incurrence of losses
within a short time after sanction / disbursement of advances needs to be
determined and action initiated to identify and address the deficiencies in the
credit appraisal systems and/or monitoring, that would require to be reviewed/
remedied, the objective being to minimise such occurrences in future; and may
entail imparting appropriate staff training and equipping the personnel with the
requisite skills.

Considering the nature and risk of trade, the Management may need to assess
generic provision, if any required, for cases of quick mortality, based on trends as
may be reflected over a period of time.
Given hereunder are cases, where there was an ostensible failure of the
appraisal system, resulting in quick mortality of the advances, instances of which
are for outstandings, each in excess of Rs.10.00 lacs.
NAME OF THE BORROWER LIMIT DATE OF DATE OF AMOUNT
SANCTIONED SANCTION/ NPA OUTSTANDING (Rs.)
(Rs) APPRAISAL
CASES OF CONSORTIUM/MULTIPLE BANKING WHERE DUE DILIGENCE CERTIFICATES

WERE NOT OBTAINED OR ON RECORD AS AT 31-3-2018
The Bank is expected to obtain in respect of advances under consortium and
multiple banking arrangements, due diligence certificates, duly certified by a
qualified Cost Accountant, Company Secretary or a Chartered Accountant, in the
form and manner specified by the Reserve Bank of India, as also reiterated
earlier vide RBI Circular No. DBOD. No. BP.BC.110/08.12.001/2008-09 dated
February 10, 2009.
It is observed that the Bank has yet to take steps for compliance of the said RBI
instructions. While in the normal course, the classification of the advances is
determined on the basis of the technical prudential norms of the RBI, the
objective of the due diligence exercise in the manner required, will enable a
view being taken as regards any adverse features that may need to be
considered and having effect on the financial information/ statements, and the
corresponding health classification of the related advances, particularly where
there may be signals of intrinsic weaknesses/risks that need to be addressed.
We give hereunder, instances of accounts that were not subjected to the due
diligence exercise in compliance of the said RBI Circular instructions. Where the
Bank is the leader in the arrangements, it should initiate the exercise by
appointment of the qualified professionals and obtaining for its record and
consideration the due diligence report and in case the leader in the consortium is
another bank, it may request for a copy of such a report from the other bank. The
contents of such a report should be kept in view at the time of renewal/review of
the limits.
NAME OF THE BORROWER NATURE OF AMOUNTS CLASSIFICATION STATUS IN
LIMITS OUTSTANDING THE BRANCH
(Rs.)
a. Where the Bank is the
leader
b. Where the Bank is not

the leader

Guidelines on Fair Practices Code for Lenders - Furnishing copy of loan agreement to
the borrowers in each case (Master Circular DBR.No.Dir.BC.10/13.03.00/2015-16 dated
July 1, 2015)
Background:
As per Para 2.5 of the Master Circular DBR.No.Dir.BC.10/13.03.00/2015-16 dated
July 1, 2015 on Loans and Advances – Statutory and Other Restrictions, RBI has advised
that the Boards of the banks should frame a Fair Practices Code based on approval of
the Guidelines on Fair Practices Code for Lenders to be followed by banks . The
Guidelines broadly deal with:
a.Loan Applications
 All application forms should be comprehensive must transparently disclose to the
borrower, and display on the website of the banks, all information about (non-
discriminatory) fees / charges payable/refundable for processing the loan application,
pre-payment options and charges, if any, penalty for delayed repayments if any,
conversion charges for switching loan from fixed to floating rates or vice versa,
existence of any interest reset clause and any other matter which affects the interest of
the borrower. Non disclosure would be an unfair practice.
 Acknowledgements receipts of all applications to state the time frame of disposal (up to
Rs.2.00 lakhs ) In the case of lending under consortium arrangement, the participating
lenders should complete appraisal of proposals in the time bound manner to the extent
feasible, and communicate their decisions on financing or otherwise within a
reasonable time.
 Verification within a reasonable period of time
 Intimation of the main reason/reasons for rejection within a stipulated time.
b.Loan appraisal and terms/conditions
 proper assessment of credit application by borrowers.
 credit limit along with the terms and conditions to be conveyed and the borrower's
acceptance to be with his full knowledge on record.
 Terms and conditions and stipulations arrived at after mutual negotiation should
be recorded and certified by the authorised official. Copy of the loan agreement
along with all enclosures quoted in the loan agreement must be furnished to the
borrower at the time of sanction / disbursement of loans.
 the loan agreement should clearly stipulate credit facilities that are solely at the
discretion of bank, including approval or disallowance of facilities, based on compliance
or otherwise by the borrower of the terms of sanction; as also for non extension of
further credit without proper review of credit limits.
c.Disbursement of loans including changes in terms and conditions
Timely disbursement of loans sanctioned; and communication of any change in the
terms and conditions including
interest rates, service charges etc. which are to be prospective.
d.Post disbursement supervision
 Post disbursement supervision by lenders, to be constructive
 Prior to decision to recall / accelerate payment or performance under the agreement or
seeking additional securities, notice to borrowers to be given as specified in the loan
agreement or a reasonable period, if no such condition exits in the loan agreement.
 release all securities on repayment of loan subject to any legitimate right or lien for
any other claim against borrowers. Right of set off shall be subject to notice.
e.General
 Banks to restrain from interference in the affairs of the borrowers except as per the
terms and conditions of the loan sanction documents (unless new information, not
earlier disclosed by the borrower, has come to the notice of the bank).
 No discrimination on grounds of sex, caste and religion in the matter of lending.
 Banks should not resort to undue harassment viz. persistently bothering the borrowers
at odd hours, use of muscle power for recovery of loans, etc.
 On receipt of request for transfer of borrowal account, the consent or otherwise should
be conveyed within 21 days from the date of receipt of request.
 Appropriate grievance redressal mechanism to resolve disputes should ensure that all
disputes based on decisions of functionaries are heard and disposed of at least at the
next higher level.

The Report may be given in the following manner:
In the following cases, there is no evidence on the records of the branch, with
regard to compliance of the said RBI directives:
Name of the Borrower Amount of Documents on Remarks
limits record dated
sanctioned
(Rs.)
We advise strict compliance of the said RBI requirements.

Change in Accounting practice as regards reversal to borrowers’ accounts of Interest
unrealized in respect of Non Performing Advances
Background:
Banks have adopted the practice to do away with Interest Suspense and accounts with similar
nomenclature, and prefer to retain the unrealized interest in the Memorandum account. In
adopting the change, the amounts earlier debited to the borrowers towards interest accrued,
are sought to be reversed and derecognized as Income of the current period. The reversal is
being made to the account of the borrower, thereby effectively reducing his debit balance,
which may earlier have been acknowledged by him. This is risk prone and needs to be
reported as under:
The attention of the Management is drawn to the Bank’s procedure and

instructions, pursuant to which the reversal of earlier income accrued but
remaining uncollected/unrealized on NPAs identified during the year, is credited
to the account of each related NPA account; the said component of unrealized
interest being required to be held in Memorandum accounts. The effect of this is,
that whereas the statements earlier furnished to customers were on the basis of
gross debits as per ledger accounts, these are now reduced and the statements
sought to be sent accordingly, are at lower figures. On this basis, the
acknowledgement of debt by the borrowers would be on reduced balances.
The legal and other implications of this action do not appear to have been
examined, particularly as to the unrealized interest earlier carried as such in the
books, as also in cases /matters in litigation, nor on the action required in cases of
restructuring involving FITL/WCTL etc. The risk factors also need to be addressed
where the account is identified as NPA in one year and restructuring/rehabilitation
is done in the following.
The Bank needs to re examine the issue and address the risks involved, as also
the effect on the gross/net NPAs and movements therein. The issue of
appropriation of recoveries in such accounts, is also relevant to be dealt with, as
will be the basis of computation of interest on the amounts accrued.
Cases where latest audited statements were not obtained or on record

Name of the Non corporate Limits (Rs.) Amount Classification Status
borrower outstanding(Rs.)
a. Corporate
a. Non Corporate

System and periodicity of Stock Audit
Stock Audits: In case of larger advances accounts (Limit Rs. 5 crore and above) stock audit
is to be carried out by the external auditors annually.
The status of Stock Audit as on 31.03.2018 is under:
Particulars No. of accounts
Stock Audit required to be conducted
Accounts where stock audit was conducted
Accounts where stock audit was not conducted
Reports Due
Reports Received
Reports awaited
Major adverse observations in stock audit reports

(Amount Rs. In lacs)
Name of the Limits Outstanding Nature of major adverse observations
borrower (Rs) balance(Rs.)
Review of non funded limits requiring provision, in cases of weak borrower or those in default:
We observe that the Bank is generally not considering or making any provisions towards
the Non funded limits in NPA cases. It needs to be understood that off-balance sheet
items / non-funded facilities are also to be recognized as credit facilities and involve risk
of loss, which, on fructification, is recorded / provided in the same manner as the loss
arising out of funded exposures. It is also to be noted that as per Accounting Standard
29 (Contingencies) issued by ICAI, the probable loss towards the present obligations
needs to be provided in the accounts, if there are chances of the fructification of the risk
of such losses. In view of the same, the Bank needs to suitably devise its policy for
recognition of such liabilities and provisions towards the same.
At the Branch, we have come across the following cases where there may be probable
losses, due to the devolvement of the contingent obligations that relate to NPAs, with
regard to which, in the absence of any policy of the Bank or guidelines of the RBI, no
provisions are considered at the Branch, but may be considered at the Head Office.
Name of the NPA Nature of Amount likely Remarks
borrower to whom/which obligation to devolve
non funded facility is likely to (Rs.)
given devolve

______________ BANK BRANCH_________________________ C.1.1 / D.5.1.1
Annexure D.6.1.1 - FORM OF MOC RELATING TO ADVANCES AMOUNT IN RUPEES
Sr. No. Name of Borrower Account No. Type of Total Classification S/SS/D/L Reversal Net CHANGES SUGGESTED UNDER ALLOCATION OF ADVANCES Remarks
Account outstanding Branch Auditors Charges Interest outstanding Secured Covered by Guarantee of Total Provision as per
C/C,O/D,D/L unrealised by Tangible Bank Govt. ECGC/ Unsecured Branch Auditors
BP/BD of T/L Assets CGTSI
1 2 3 4 5 6 7 8 9= 4-(7+8) 10 11 12 13 14 15 16
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Coded adverse
features given in C II
SS= Sub Standard : D= Doubtful (to be classified as D1, D2, D3) : L= Loss
Note: See formats in D.5.1.2. 1. & D.5.1.2.2
If not covered by the coded remarks, the reasons may be separately stated.

D.5.1.2….1
RECOMMENDED ANNEXURE TO AUDITORS REPORT
___________________________BANK: BRANCH______________REGION/DISTT./CIRCLE_____________________________
ANNEXURE-D.5.1.2 TO AUDIT REPORT DATED…………….
Statement showing summary of Memorandum of Changes affecting Advances as at 31.3.2018
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Bank/Govt
Particulars Code SecuredGuaranteed Unsecured Doubtful Remarks
Add/(Deduct) Add/(Deduct) Add/(Deduct) Add/(Deduct)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
I Bills Purchased:
Priority Sector
Public Sector
Banks
Others
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total I
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
II. Cash Credits,
Overdrafts,
Demand Loans etc:
Priority Sector
Public Sector
Banks
Others
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total II
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
III. Term Loans:
Priority Sector
Public Sector
Banks
Others
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total III
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Grand Total (I+II+III)
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NOTES/INSTRUCTIONS:
1. Only one figure must appear against each item & deductions/negative figures must be shown in brackets
2. Reasons for changes must be given in the proforma as per Annexure D.5.1.2
28
D.5.1.2….2
RECOMMENDED ANNEXURE TO AUDITORS REPORT

________________________________ BANK: BRANCH____________________REGION/DISTT./CIRCLE_________________
ANNEXURE-D.5.1.2 TO AUDIT REPORT DATED…………….

STATEMENT OF REASONS FOR CHANGES RECOMMENDED IN ANNEXURE D.5.1.1 TO THE REPORT
PARTICULARS CHANGES IN CLASSIFICATION

____________________________________________________________________
Name of the Secured Govt./Bank Unsecured Additional

Party Guarantees Provision
Recommended
Priority Public Banks Additional Existing Remarks
Sector Sector Other Provision Provision
______________________________________________________________________________________________________________________________________
I. Bills Purchased
______________________________________________________________________________________________________________________________________
II. Cash Credits,

Overdrafts,
Demand
Loans etc.:
_____________________________________________________________________________________________________________________________________
Total
_____________________________________________________________________________________________________________________________________
III. Term Loans
_____________________________________________________________________________________________________________________________________
Total
______________________________________________________________________________________________________________________________________
29
D.5. 1.3
Annexure D.5.1.3 – Recommended format for MOC
MEMORANDUM OF CHANGES (other than Advances) ANNEXED TO AUDIT REPORT DATED _____________FOR THE YEAR 2017-18
Code Head of Account Profit & Loss Account Items Balance Sheet Items Remarks/ Reasons for
Increase Decrease Increase Decrease Changes/ Report Para
Rs. Rs. Rs. Rs. Reference
Total
OFF BALANCE SHEET HEADS:
Total
Qualifications/observations where the amounts have not been ascertained Paras:

D.5.1.4
__________________ BANK: BRANCH____________________REGION/DISTT./CIRCLE_________________
List of advances Accounts for which interest calculations checked for the year 2017-18 Nature of Account _______________________
Name of Account No. Credit Rating Period of Interest Correct Excess Short Charged Remarks
the Checking Charged Interest charged
Borrower Applicable Actually Rs. Rs. Rs. Rs.
applied
Signatures

D.L.1
BANK AUDIT 2017-18
LONG FORM AUDIT REPORT – QUESTIONNAIRE AND RECOMMENDED ACTION FOR REPORTING
1. This Long Form Audit Report should be addressed by the branch auditors to the Chairman of the bank concerned with a copy
thereof to the Central Statutory Auditors.
2. The following paragraphs list the matters which the branch auditors of banks are expected to comment upon in their Long Form
Audit Reports. The appendix to this questionnaire contains questions which are relevant to specialised branches dealing in foreign
exchange transactions, recovery of non-performing assets, clearing house operations and branches having very large advances.
Auditors of foreign branches of Indian Banks should also furnish this report. In the case of such branches, reference to the Reserve
Bank of India should be construed to include the Reserve Bank of India, as well as the relevant regulating authority of the foreign
country where the branch is located.
Where any of the comments made by the auditors in their LFAR is adverse, they should consider whether a qualification in their main
report is necessary. It should not, however, be assumed that every adverse comment in the LFAR would necessarily result in a
qualification in the main report. In deciding whether a qualification in the main report is necessary, the auditors should use their
judgment in the facts and circumstances of each case. Where the auditors have any reservations or adverse remarks with regard to
any of the matters to be dealt with in their Long Form Audit Reports, they may give the reasons for the same. Also, where relevant,
instances of situations giving rise to their reservations or adverse remarks may also be given.
3. There is no prescribed format of reporting, so long as the questionnaire is responded to, preferably in a sequential order.
QUESTIONNAIRE ACTION REQUIRED AND REPORTING

1. ASSETS
1.Cash
a) Does the branch generally carry cash balances, which vary significantly Objective of this information is to ensure better cash
from the limits fixed by the controlling authorities of the bank? Whether management.
excess balances have been reported to the controlling authorities of the Ask if any limits of cash retention have been fixed by the
bank? Controlling Authority in the Bank. If so ask as to whether any
exceptional reports are generated that show any excess amounts
held on any days. If so, if the retention is far in excess of the
norms laid down; and enquire into the reasons for such excess
retention and check what intimation was sent to the controlling
authorities.
Minor variations need not be reported.
Report covers:
Significant variations
Non reporting of such variations

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The auditor should report any cash retention that appears
abnormally high in the light of the normal requirements of
the branch, particularly, if the branch has easy access to
cash either because it has a currency chest or is in the
immediate vicinity of any currency chest at another branch,
or where cash can be deposited/withdrawn under banking
arrangements with another bank in the immediate vicinity.
b) Does the branch hold adequate insurance cover for cash-on-hand and Normally insurance covers are taken at Head Office. This may be
cash-in-transit? so stated in the report.
If a cover is taken at the Branch, check if it is inadequate,
based on the normal requirements , including for amounts in
transit.
c) Is cash maintained in effective joint custody of two or more officials, as per Normally cash is under dual control, but if it effectively not under
the instructions of the controlling authorities of the bank? dual control, this would require reporting. The Auditor needs
evidence in support of his report if adverse.
d) Have the cash balances at the branch been checked at periodic The Branch usually has a system to record on a daily basis, the
intervals as per the procedure prescribed by the controlling authorities of cash holding under the signatures of two authorized officials .
the bank? The evidence for this can be reviewed. Evidence , if not
available, should be reported.
 Cash includes balances in ATM attached to the branch
and expected to be reflected correctly. ATM balances
must be in round figures corresponding to the
denomination of the notes stuffed in the ATMs; and if
otherwise, this needs to be reported in the Main Report
and repeated/elaborated in the LFAR.
 Since cash may be withdrawn from the ATM after the
cut off time at the year end, the amount of difference
between the ATM Scroll and that as per the books needs
to be reconciled, and if not, the same needs to be
reported.
 Banks have a system of appointing agents who handle
cash for stuffing into the ATMs. It must be checked as to

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what accounting treatment is given to cash held by such
agents (as cash or advances) , at what levels is the
amount held by them. Anything abnormal observed in
this area requires reporting in the LFAR.
 Cash may include soiled notes held at the branch since
long and would have to be reported .
 Cash held in sealed packets, in cases of vigilance/fraud,
if part of the cash balance , may be reported as such.
2. Balances with Reserve Bank of India, State Bank of India and

Other Banks
a) Were balance confirmation certificates obtained in respect of The system of direct confirmation procedures needs to be
outstanding balances as at the year-end and whether the aforesaid checked. The system must ensure that the balances
balances have been reconciled? The nature and extent of confirmation certificates are obtained from the other banks
differences should be reported. for balances as per their books and not by an endorsement
of those banks on the balance confirmation prepared by the
auditee bank for balances in its own books.
If the certificate on the letter head of the other bank shows a
balance at variance with the books of the auditee bank, the
reconciliation must be seen and observations given as
required by the following clauses.
Certificate from RBI will be relevant only at the few
designated branches which maintain RBI Account(s); and
does not apply to lined branches having currency chests. In
case of State Bank of India, accounts with its
associates/subsidiaries will need to be obtained and vice
versa.
b) Your observations on the reconciliation statements may be reported in While there may not normally be any cash transactions that
the following manner: remain to be recorded, it is possible that some revenue
i) Cash transactions remaining unresponded (give details); transactions may remain pending and require to be commented
ii) Revenue items requiring adjustments/write-off (give details); upon.

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iii) Old outstanding balances remaining unexplained / unadjusted.
Give details for: If these are old/large transactions, these may also find place
- Outstanding between six months and one year; and in the Main Report and can be repeated /elaborated in the
- One year and above LFAR.
In branches having RBI Accounts, currency chest

deposits/withdrawals at linked branches that originate prior
to , but are recorded after the year end, need to be reported
in the Main Report through MOC, on a value date basis; and
the same is to be repeated / incorporated in the LFAR.
Similarly care must be taken in respect of cash drawing
arrangements inter se SBI/its associates and other banks,
as this could have effect on the Inter branch balances and
the SBI/its associate bank accounts. If so, this will be
reported in the Main Report and elaborated/repeated in the
LFAR.
c) In case any item deserves special attention of the management, the If the Branch is carrying in its books, old balances
same may be reported. outstanding in accounts which have been closed, or there
are disputed old entries on account of clearing etc. and
these continue to be reflected in the branch balance sheet,
these must be reported.
3. Money at Call and Short Notice This item would normally not appear except at a very few
Has the Branch kept money-at-call and short notice during the year? If designated branches. If so, the authority to place moneys at call
so, whether instructions/ guidelines, if any, laid down by the Controlling and short notice, must be enquired into and the branch needs to
Authorities of the Bank have been complied with? be requested to confirm the guidelines laid down by the Bank in
this regard.
4.. Investments
A) For Branches in India Verification of Investments is generally not required at
a) Are there any investments held by branches on behalf of Head branches as this is the function of the Investment
Office/Other offices of the bank? If so, whether these have been made Department; and the question relates to Investments, if held
available for physical verification or evidences have been produced with physically , at any branch, for collection of interest/yield, if

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regard to the same where these are not in possession of the branch? any locally. This would also be rare as most investments are
b) Whether any amounts received as income on such investments have in demat form.
been reported to the Head Office? However, if so held, the verification needs to be done at the
c) In respect of investments held by branches on behalf of Head Office/other branch, on behalf of the Head Office.
offices of the bank whether any income is accrued/ received and recognized Income, if any received/collected at the Branch, belongs to
as income of the branch contrary to the instructions of the controlling Head Office and cannot be considered as the income of the
authorities of the bank? Branch.
d) Whether there are any matured or overdue investments which have not Investments that are overdue /matured, need to be
been en-cashed? If so, give details? confirmed to the auditors at Head Office, dealing with this
e) Whether the Guidelines of the Reserve Bank of India regarding issue.
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.
B) For Branches outside India Not applicable to auditors in India
a) In respect of purchase and sale of investments, has the branch acted within
its delegated authority, having regard to the instructions/ guidelines in this behalf
issued by the controlling authorities of the bank?
b) Have the investments held by the branch whether on its own account or on
behalf of the Head Office/other branches been made available for physical
verification? Where the investments are not in the possession of the branch,
whether evidences with regard to their physical verification have been
produced?
c) Is the mode of valuation of investments in accordance with the RBI
guidelines or the norms prescribed by the relevant regulatory authority of the
country in which the branch is located whichever are more stringent?
d) Whether there are any matured or overdue investments which have not been
en-cashed? If so, give details?
5. Advances
(The answers to the following questions may be based on the auditor’s
examination of all large advances and a test check of other advances. In
respect of large advances, all cases of major adverse features,
deficiencies, etc. should be reported. In respect of other advances, the
auditor may comment upon the relevant aspects generally, along with

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instances of situations giving rise to his reservations or adverse remarks.
For this purposes, large advances are those in respect of which the
outstanding amount is in excess of 5% of the aggregate advances of
the branch or Rs. 2 crore, whichever is less.)
a) Credit Appraisal The auditor is required to enquire into the system of appraisal/re
In your opinion, has the branch generally complied with the procedures/ appraisal of the advances and the manner of making the appraisal
instructions of the controlling authorities of the bank regarding loan as laid down by the Bank.
applications, preparation of proposals for grant/ renewal of advances, In case of existing borrowers where renewal of limits is involved, it
needs to be enquired as to documentation/evidence at the branch,
enhancement of limits, etc., including adequate appraisal documentation
as to whether the following, among others, are considered
in respect thereof.  the past performance of the parties is satisfactory and
 level of compliance by the borrower , of the bank’s
requirements
 whether monitoring, supervision and controls, through
Inspection/internal/concurrent /credit audit reveal any adverse
features that have a bearing on the proposal
 whether the credit rating of the borrower has changed
 whether the projections/purpose in respect of the advance have
changed
The branch needs to make available, cases of quick mortality, of
advances appraised and sanctioned, where within say within 12-24
months the advances have turned NPA. Such cases must be
reported, notwithstanding that these have been classified as such
and provided for.
b) Sanctioning/ Disbursement This clause is restricted to reporting on cases examined
i) In the cases examined by you, have you come across instances of where the branch has exceeded its limit /authority in
credit facilities having been sanctioned beyond the delegated authority sanctioning advances, including ad hoc limits being given.
or limit fixed for the branch? Are such cases promptly reported to higher This requires the auditor to know of the delegation of
authorities? powers of the branch management.
An exception report generated in this regard will reveal the
number of times the authority has been exceeded and
whether the same was reported to the higher authorities.

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ii) In the cases examined by you, have you come across instances where This is relevant in cases examined, where the terms and
advances have been disbursed without complying with the terms and conditions of sanction are not complied with, Details need to
conditions of the sanction? If so, give details of such cases. be given in the LFAR. This would include cases of
restructuring, rehabilitation etc. where disbursements have
been made though conditions imposed have yet to be
complied with
c) Documentation
i) In the cases examined by you, have you come across instances of Details of this need to be given in the LFAR
credit facilities released by the branch without execution of all the
necessary documents? If so, give details of such cases
ii) In respect of advances examined by you, have you come across This would include any over/under documentation or blank
instances of deficiencies in documentation, non-registration of charges, documents executed between the bank and the borrower; and
non-obtaining of guarantees, etc.? If so, give details of such cases. cases need to be listed for documentation defects to be covered
by the LFAR. If it goes to the root of the matter and affects the
classification of the borrower, it will have a bearing on the Main
Report and details may be elaborated in the LFAR.
iii) Whether advances against lien of deposits have been properly granted Care needs to be taken to ensure that the advances against
by marking a lien on the deposit in accordance with the guidelines of the Deposits , are to be given only against those issued by the bank
controlling authorities of the bank. and not against deposits of other banks. Lien marking on the
deposits of the bank is mandatory and the deposit receipt duly
discharged by the holder of the deposit against which he has
availed credit, should be on record. Otherwise this would require
reporting.
d) Review/ Monitoring/ Supervision
i) Is the procedure laid down by the Controlling authorities of the bank, for Any accounts that are due for review /renewal and have not been
periodic review of advances including periodic balance confirmation/ so done, are covered for reporting. In the normal course, such
acknowledgment of debts, followed by the Branch? Provide analysis of accounts would figure for being classification as NPAs and would
the accounts overdue for review/ renewal have been so examined.
A list of such accounts needs to be given in the LFAR
- between 6 months and 1 year, and
Attention is drawn to Clause 4.2.4 of the Master Circular
- over 1 year DBR.No.BP.BC.2/21.04.048/2015-16 dated 1-7-2015 relating to
Accounts with temporary deficiencies, which stipulates that any
outstanding in the account based on drawing power calculated
from stock statements older than three months, would be deemed

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as irregular and will become NPA if such irregular drawings are
permitted in the account for a continuous period of 90 days even
though the unit may be working or the borrower's financial
position is satisfactory. Further, regular and ad hoc credit limits
need to be reviewed/ regularised not later than three months from
the due date/date of ad hoc sanction and delay beyond six months
is not considered desirable as a general discipline. Hence, an
account where the regular/ ad hoc credit limits have not been
reviewed/ renewed within 180 days from the due date/ date of ad
hoc sanction will be treated as NPA.
ii) Are the stock/ book debt statements and other periodic operational data As per the terms of sanction, stock statements and statement of book
and financial statements, etc., received regularly from the borrowers and debts exigible for drawing power (DP) , are required to be received by the
branch at periodic intervals, usually on a monthly basis. In the case of
duly scrutinized? Is suitable action taken on the basis of such scrutiny in consortium banking, it is the leader bank that computes the DP and
appropriate cases? passes it on to the other banks in consortium. On receipt of the
information, the branch is expected to check the same as to its accuracy
/integrity, to ensure that the information is authentic and realistic and is
based on the books and records of the borrower; and further that the
computation of the DP is in consonance with the terms of sanction and
margins have been applied to the net exigible amounts. If prima facie the
DP computed by the leader bank in consortium, is appropriate, it needs to
be accepted ,but must be recomputed , if the same is incorrectly prepared.
As per the system of the bank, there needs to be evidence on record of
the internal verification procedures as regards such information.
iii) Whether there exists a system of obtaining reports on stock audits Banks are expected to have in place a mechanism to get stock
periodically? If so, whether the branch has complied with such system? audits done at periodic intervals to be sure of the existence and
realistically assessed realizable value of the security. With a view
to bringing down divergence arising out of difference in
assessment of the value of security, in cases of NPAs with balance
of Rs. 5 crore and above, stock audit at annual intervals by
external agencies appointed as per the guidelines approved by the
Board are mandatory. Collaterals such as immovable properties
charged in favour of the bank needs to be got valued once in three
years by valuers appointed as per the guidelines approved by the
Board of Directors.

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The system followed by the bank needs to be enquired into and
the LFAR will cover reporting on
 Stock audit required but not got done as per the system or as
per the imposition of the RBI; and
 Stock audit done, but with adverse comments that have effect
on the classification and provisioning
iv) Indicate the cases of advances to non-corporate entities with limits Audited accounts would require that the financial statements with
beyond Rs.10 lakhs where the Branch has not obtained the accounts of notes and accounting policies followed, will be accompanied with
borrowers, duly audited under the RBI guidelines with regard to compulsory an auditors report, so that the same can be considered
audit or under any other statute. appropriately as regards audit qualifications , if any. Mere
certification/attestation on statements, will not mean that these are
audited for the purpose of this clause.
v) Has the inspection or physical verification of securities charged to the Based on information as to the system to be followed, the auditor
Bank been carried out by the branch as per the procedure laid down by the should satisfy himself as to whether inspection of the securities,
controlling authorities of the bank? has taken place and there is evidence on record thereof, to
consider reporting in the LFAR.
vi) In respect of advances examined by you, have you come across Accounts where such deficiencies have been noticed need to be
cases of deficiencies in value of securities and inspection thereof or any other reported. One of the key areas of concern is the existence and
adverse features such as frequent/ unauthorized overdrawing beyond limits, market value of the securities that needs to be evidenced on
inadequate insurance coverage, etc.? record, as also the computation of the Drawing Power. Cases
where there is no insurance coverage or where the same is
inadequate , or where the risk of over insurance will lower the
amount of the claim, or where the policies have lapsed, need to be
reported.
vii) In respect of leasing finance activities, has the Branch complied with the The laid down system needs to be checked and any non
guidelines issued by the controlling authorities of the bank relating to security compliance thereof reported.
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? Normally credit card dues are intimated to the bank’s card holders
at periodic intervals from a centralized division/cell. Normally the
accounts of the credit card holders are debited on a centralized
basis, unless the system warrants the debits to be raised on
communications received at each branch. In case of the latter,
there can be a reporting on this question.

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ix) Has the branch identified and classified advances into standard/ sub- The Auditor , based on examination of the relevant advances
standard/doubtful/loss assets in line with the norms prescribed by accounts, will judge as to whether the branch management has
the Reserve Bank of India classified the advances into their appropriate health status
(The auditor may refer to the relevant H. O. instructions for (Standard/sub standard/doubtful/loss). In this connection, it is the
RBI norms that will be considered, where the bank’s norms are not
identification of NPAs and Classification of Advances)
in consonance with those of the bank.
The Main Report of the auditor will be qualified where he disagrees
with the classification by the branch management and the effect of
any qualification on provisioning and income recognition will form
part of that report, with elaboration in the LFAR.
x) Where the auditor disagrees with the branch classification of advances As stated above
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 The related details need to be obtained and reported.
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 Rehabilitation covers restructuring, nursing and rephasement of
Controlling Authority of the bank? Also state whether any rehabilitation the loans and advances. Most banks have in place the system of
reporting such accounts and are covered by the lending policy;
programme in respect of such advances has been undertaken, and if so, the and are reported to the controlling authority. Yet, the system
status of such programme. needs to be enquired into and reported as per the system in
generic terms.
xiii) Have appropriate claims for DICGC and Export Credit Guarantee/ Insurance Most banks have opted out of the DICGC Scheme
and subsidies, if any, been duly lodged and settled? The status of pending Details need to be obtained for credit guarantee and given
claims giving year wise break-up of number and amounts involved should be in the format prescribed.
given in the following format.

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S Particulars Number Amount(Rs.)

No.
A Claims as at the beginning of the
year (Give year-wise details)
Total A
B Amounts representing:
a) Claims accepted/ settled
(give year-wise details)
b) Claims rejected
Total B
Balance as at the year-end
A-B
xiv) In respect of non-performing assets, has the branch obtained This is a factual reporting requirement and based on reports
valuation reports from approved valuers for the fixed assets charged to the sought and obtained by the bank in cases of NPA, need to
bank, once in three years, unless the circumstances warrant a shorter be requested.
duration?
xv) In the cases examined by you has the branch complied with the Recovery Based on the compliance of the Recovery Policy, the
Policy prescribed by the controlling authorities of the bank with respect to response can be given.
compromise/ settlement and write-off cases? Details of the cases of Details of the cases of compromise/ settlement and write-off
compromise/ settlement and write-off cases involving write-offs/ waivers in cases involving write-offs/ waivers in excess of Rs.50 lakhs
excess of Rs.50 lakhs may be given. need to be obtained and given.
xvi) List the major deficiencies in credit review, monitoring and supervision This would be on factual basis, based on observations in the
course of audit
e) Guarantees and Letters of Credit

i) Details of outstanding amounts of guarantees invoked and funded by the Branch at This is on factual basis
the end of the year may be obtained from the management and reported in the
following format:

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a) Guarantees invoked, paid but not adjusted This is on factual basis
Sr.No. Date of Name of Name of Amount Date of Remarks
invocation the party beneficiary Recovery
b) Guarantees invoked but not paid This is based on factual basis

Sr.No. Date of Name of Name of Amount Date of Remarks
invocation the party beneficiary Recovery
ii) Details of the outstanding amounts of letters of credit and co-acceptances funded This is on factual basis
by the Branch at the end of the year may be obtained from the management and
reported in the following format.
Sr.No Date of Name of Nature (LC/ Amount Date of Remarks

funding the Party co- Recovery
acceptance,
etc.)
6. Other Assets
a) Stationery and Stamps
i) Does the system of the bank ensure adequate internal control over issue and The bank is expected to have a dual control over numbered
custody of stationery comprising security items (Term Deposit Receipts, Drafts, /critical/security paper stationery. Any breach of the system will
Pay Orders, Cheque Books, Traveller's Cheques, Gift Cheques, etc.)? Whether invite adverse comments in the report. Based on physical
the system is being followed by the branch? verification procedures, the auditor will make his report, if adverse.
The auditor , if he finds any weakness in the system for receipt,
issue, custody, control over, or in transmission of such security
items, or if these are not in dual control at any stage from receipt
till utilization, he will report the same.
ii) Have you come across cases of missing/ lost items of such stationery? This would have to be reported, based on physical verification.
b) Suspense Accounts/ Sundry Assets
i) Does the system of the bank ensure expeditious clearance of items debited to Reporting this aspect is to be on factual basis.
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?
If so, give details in the following format:
Year Amount (Rs.) Remarks

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ii) Does your test check indicate any unusual items in these accounts? Reporting this aspect is to be on factual basis.
If so, report their nature and the amounts involved.
II. LIABILITIES
1. Deposits
i) Have the controlling authorities of the bank laid down any guidelines Banks have a system in place generally with regard to accounts
with respect to conduct and operations of Inoperative Accounts? In the beintg treated as dormant and inoperative and to revive them
cases examined by you, have you come across instances where the under stringent conditions being satisfied. The guidelines, if
guidelines laid down in this regard have not been followed? If yes, give satisfactory, need not be reported. Weakness therein , is the
details thereof. subject matter of report.
ii) After the balance sheet date and till the date of audit, whether there Sudden drop in or increase in figures of deposits need to be
have been any unusual large movements (whether increase or decrease) enquired into and reported if there is unusual movement in
in the aggregate deposits held at the year-end? If so, obtain the deposits, aimed at window dressing the year end figures.
clarification from the management and give your comments thereon
Are there any overdue/ matured term deposits at the end of the year? The banks have adopted a system of auto renewal of
iii)
If so, amounts thereof should be indicated. deposits on maturity, due to a stipulation to that effect in the
Deposit receipts at origination. Since the practice was
commenced from a specified date, it is possible that there
arfe deposits prior to that date that are still held as
unpaid/matured/ overdue deposits, including in cases where
the depositor may have died or the deposit remains
unclaimed for any reason whatsoever. LFAR needs to cover
such deposits.
2. Other Liabilities
Bill Payable, Sundry Deposits, etc.
i) The number of items and the aggregate amount of old outstanding items pending Very likely that at the branch level, there may not be any Bills
for three years or more may be obtained from the Branch and reported Payable, since most banks have centralized transactions relating
under appropriate heads. Does the scrutiny of the accounts under various to Drafts and other similar instruments, However if there are any
sub-heads reveal old balances? If so, give details in the following format: items still retained at branch, a year wise summary may be got
Year No. of Items Amount (Rs.) Remarks generated. It would be useful if even items that are over 6 months
old may be given, as it is not logical that such instruments are not
encashed by the customers. In the course of audit, it may be got
confirmed if the Branch is holding in its custody any such
instruments that remain undelivered. The risks attached to this
may be brought into the report.

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ii) Does your test check indicate any unusual items or material Drafts paid ex-advice or against which there is no prior
withdrawals or debits in these accounts? If so, report their nature and credit , are a matter of serious concern, as the transaction
the amounts involved could be the result of a fraud. Frequent cancellation of such
instruments and their re-issue must be examined with extra
caution, as there is a risk of substitution of the holder.
3. Contingent Liabilities
List of major items of the contingent liabilities (other than constituents’ An enquiry needs to be made in respect of this item and
liabilities such as guarantees, letters of credit, acceptances, endorsements, reported on factual basis.
etc) not acknowledged by the Branch?
III PROFIT AND LOSS ACCOUNT
1. Whether the branch has a system to compute discrepancies in interest/ discount In the normal course such entries are generated by the system,
and for timely adjustment thereof in accordance with the guidelines laid down in without scope for any manual intervention. In case interest is not
this regard by the controlling authorities of the bank? Has the test checking of being charged as per the terms of sanction and the input
interest revealed excess/ short credit of a material amount? If so, give details information is incorrect, that will cause a discrepancy.
thereof. In the cases examined , the interest being compatible with the
credit rating to the parties is of importance, and can cause
discrepancies that need to be reported.
2. Has the branch complied with the Income Recognition norms prescribed by The instructions of the Bank necessarily would be in line with the
RBI? (The Auditor may refer to the instructions of the controlling authorities of the significant accounting policies of the bank as also in line with RBI
bank regarding charging of interest on non-performing assets). stipulations as regards recognizing revenue, as also following the
principles laid down in the AS 9 Revenue Recognition issued by
ICAI. If not, this would be a reportable matter.
3. Whether the branch has a system to compute discrepancies in interest on The Banks in the normal course would have this on a “system
deposits and for timely adjustment of such discrepancies in accordance with the driven” basis. If the contracted rate is wrongly input into the
guidelines laid-down in this regard by the controlling authorities of the bank? Has system, there can be discrepancies, or if there is any manual
the test check of interest on deposits revealed any excess/ short debit of material intervention. What is important is to check whether the system
amount? If so, give details thereof. itself is faulty, e.g., if computation is made on the basis of a 360
instead of a 365 day year. Reference could also be made to
verification of interest by the concurrent auditors or revenue
auditors or in inspection. Ifany entries are being made at the
instance of the borrower for short credit/payment, the reasons
therefore need to be determined, to ensure that this is not due to
any system fault.

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4. Does the bank have a system of estimating and providing interest The system of the bank needs to be enquired into,
accrued on overdue/ matured term deposits? particularly in respect of deposits not covered by the
automatic renewal system; as also in respect of deceased
depositors, where interest needs to be paid.
5. Are there any divergent trends in major items of income and Such a statement must be got prepared and reviewed. The
expenditure, which are not satisfactorily explained by the branch? If divergent trends need to be worked on some logical basis,
so, the same may be reported upon. For this purpose, an appropriate e.g., the monthly averages can be seen in respect of
statement may be obtained from the branch management explaining deposits and advances at the branch; and reasons for
the divergent trends in major items of income and expenditure. divergence enquired into.
IV GENERAL
1. Books and Records
a) In case any books of account are maintained manually, does If any books are manually maintained, this question would
general scrutiny thereof indicates whether they have been properly be relevant.
maintained, with balances duly inked out and authenticated by the
authorised signatories?
b) In respect of computerized branches: A note needs to be taken from Branch Management as
o Whether hard copies of accounts are printed regularly? regards the system followed; and the same needs to be
o Indicate the extent of computerization and the areas of tested for its veracity.
operation covered. It may be confirmed as to which of the systems have
o Are the access and data security measures and other internal centralized control as regards security, disaster recovery,
controls adequate? off site storage.
o Whether regular back-ups of accounts and off-site storage are Based on the review of the system and its implementation,
maintained as per the guidelines of the controlling authorities the necessary report would be made.
of the bank?
o Whether adequate contingency and disaster recovery plans
are in place for loss/ encryption of data?
o Do you have any suggestions for the improvement in the
system with regard to computerized operations of the branch?

D.L.1
BANK AUDIT 2017-18
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 It is doubtful that there would be unreconciled control and
reconciled should be given under the respective heads, preferably in the subsidiary records, unless these arse from the time prior to
following format: computerization.. the reporting on this issue would be
factual.
Account Date General Subsidiary Last Date
Ledger Balance on which
Balance (Rs.) balanced
(Rs.)
3. Inter Branch Accounts

i) Does the branch forward on a daily basis to a designated cell/ Head The system of matching of entries on a centralized basis and
Office, a statement of debit/credit transactions in relation to other reconciliation needs to be found out. With a totally
branches? computerized system, the only aspect that assumes
importance is the inward communications from the
centralized cell/division, as to clarification on the basis of
the original evidence that will help match the entries.
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 debit as at year-
end which remain unexplained in the accounts relatable to inter-branch
adjustments?

D.L.1
BANK AUDIT 2017-18
4. Audits/Inspections
i) Is the branch covered by concurrent audit or any other audit/ This a factual reporting
inspection during the year?
ii) In framing your audit report, have you considered the major adverse Previous/latest reports need to be reviewed and for matters/issues
comments arising out of the latest reports of the previous auditors, that remain uncomplied with, if unattended, need to be reported
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.
5. Frauds
Furnish particulars of frauds discovered during the year under audit at the Frauds discovered by Management need to be reported based on
branch, together with your suggestions, if any, to minimise the possibilities information to be obtained. If any matters are pending enquiry,
of their occurrence. vigilance etc. it needs to be enquired into.
The knowledge of the modus operandi of the frauds discovered
will enable the auditor to make recommendations to minimize the
risk of frauds.
6. Miscellaneous
i) Does the examination of the accounts indicate possible window dressing? Transactions towards the year end/quarter end need to be
reviewed to ensure that there is no sudden spurt of
deposits/advances that have been adjusted /squared off just after
the close of the period. I transactions are mere book adjustments
that cause the window dressing, these must be reported
ii) Does the branch maintain records of all the fixed assets acquired and The system followed needs to be understood. Evidence of physical
held by it irrespective of whether the values thereof or depreciation verification of assets needs to be reviewed.
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.
iii) Are there any other matters, which you as a branch auditor would like This is an important clause and all residue matters that have
to bring to the notice of the management or the Central Statutory engaged the attention of the auditor, must be reported here.
Auditors? Refer D.L.2 and D.L.2.1 for the text recommended in respect
of matters that could be considered for reporting.

D.L.1
BANK AUDIT 2017-18
APPENDIX
QUESTIONNAIRE APPLICABLE TO SPECIALISED BRANCHES
A. For Branches dealing in Foreign Exchange Transactions
1. Are there any material adverse features pointed out in the reports of concurrent auditors, internal auditors and / or the Reserve Bank of
India’s inspection report which continue to persist in relation to NRE/ NRO/ NRNR/ FCNR-B/EEFC/ RFC and other similar deposit
accounts . If so, furnish the particulars of such adverse features.
2. Whether the Branch has followed the instructions and guidelines of the controlling authorities of the bank with regard to the following in
relation to the foreign exchange. If not, state the irregularities:
a) deposits
b) advances
c) export bills
d) bills for collection
e) dealing room operations (where a branch has one)
f) any other area
3. Obtain a list of all Nostro Accounts maintained/ operated by the Branch from the branch management.
a) Are the Nostro Accounts regularly operated?
b) Are periodic balance confirmations obtained from all concerned overseas branches/ correspondents?
c) Are these accounts duly reconciled periodically? Your observations on the reconciliation may be reported.
4. Does the Branch follow the prescribed procedures in relation to maintenance of Vostro Accounts?
B. For branches dealing in very large advances such as corporate banking branches and industrial finance branches or branches
with advances in excess of Rs.100 crores.
1. In respect of borrowers with outstanding of Rs.2.00 crore and above, the
information in the enclosed format should be obtained from the Branch
Management. Comments of the Branch Auditor on advances with significant
adverse features and which might need the attention of the management/
Central Statutory Auditors should be appended to the Long Form Audit Report.
2. What, in your opinion, are the major shortcomings in credit appraisal, monitoring, etc.?

D.L.1
BANK AUDIT 2017-18
3. List the accounts (with outstandings in excess of Rs.1.00 crore), which have either been downgraded or upgraded with regard to their
classification as Non Performing Asset or Standard Asset during the year and the reasons therefore.
C. For branches dealing in recovery of Non Performing Assets such as Asset Recovery Branches
1. In respect of borrowers with outstanding of Rs.2.00 crore and above, the information in the enclosed format should be obtained from the Branch
Management. Comments of the Branch Auditor on advances with significant adverse features and which might need the attention of the
management/ Central Statutory Auditors should be appended to the Long Form Audit Report.
2. List the accounts (with outstandings in excess of Rs.2.00 crores), which have been upgraded from Non Performing to Standard during the year and
the reasons therefore.
3. Whether the Branch has a system of updating periodically, the information relating to the valuation of security charged to the bank?
4. Age-wise analysis of the recovery suits filed and pending may be furnished.
5. Is the Branch prompt in ensuring execution of decrees obtained for recovery from the defaulting borrowers? Also list the time barred decrees, if any,
and reasons therefor.
6. List the recoveries and their appropriation against the interest and the principal and the accounts settled/ written off/ closed during the year.
7. List the new borrower accounts transferred to the Branch during the year. Have all the relevant documents and records relating to these borrower
accounts been transferred to the Branch? Has the Branch obtained confirmation that all the accounts of the borrower (including non-fund based
exposures and deposits pending adjustment/ margin deposits) been transferred to the Branch?
D. For branches dealing in clearing House Operations, normally referred to as Service Branches
1. Does the branch have a system of periodic review of the outstanding entries in clearing adjustments accounts? In your view has the system
generally been complied with?
2. Whether review of the clearing adjustments accounts (inwards/ outwards) reveals any old/large/unusual outstanding entries which remain
unexplained? Give year-wise break-up of outstanding in number and value:
Inward Clearing Number Value
Normal Clearing
High Value Clearing
Inter- Branch Clearing
National Clearing
Returned/Dishonoured Clearing
Outward Clearing
Number Value
Normal Clearing
High Value Clearing
Inter- Branch Clearing
National Clearing
Returned/Dishonoured Clearing

D.L.1
BANK AUDIT 2017-18
3. Has the Branch strictly followed the guidelines of the controlling authority of the bank with respect to operations related to clearing transactions?
Comment on the systems and procedures followed by the Branch in this regard.
ANNEXURE TO THE Long Form Audit Report
(FOR LARGE/IRREGULAR/CRITICAL ADVANCE ACCOUNTS)
(to be obtained from the branch management by the Branch Auditors of branches dealing in large advances/ asset recovery branches)
1. Name of the Borrower
2. Address
3. Constitution
4. Nature of business/activity
5. Other units in the same group
6. Total exposure of the branch to the Group
Fund Based (Rs.in Lakhs)
Non-Fund Based (Rs.in Lakhs)
7. Name of Proprietor/ Partners/ Directors
8. Name of the Chief Executive, if any
9. Asset Classification by the Branch
a) as on the date of current audit
b) as on the date of previous Balance Sheet
10. Asset Classification by the Branch Auditor
a) as on the date of current audit
b) as on the date of previous Balance Sheet
11. Are there any adverse features pointed out in relation to asset classification by the Reserve Bank of India Inspection or any other audit.
12. Date on which the asset was first classified as NPA (where applicable)
Facilities sanctioned:
Date Nature of Limit Prime Collateral Margin% Balance outstanding at the year-end
of Sanction facilities (Rs. in Security Security
Lakhs)
Current year Previous year
Provision Made: Rs.___ Lakhs

D.L.1
BANK AUDIT 2017-18
13 Whether the advance is a consortium advance or an advance made on multiple- bank basis
14. If Consortium,
a) names of participating banks with their respective shares
b) name of the Lead Bank in Consortium
15. If on multiple banking basis, names of other banks and evidence thereof
16. Has the Branch classified the advance under the Credit Rating norms in accordance with the guidelines of the controlling authorities of the
Bank
17. a) Details of verification of primary security and evidence thereof;
b) Details of valuation and evidence thereof
Date verified Nature of Security Value Valued by
Insured for Rs.__________ lakhs (expiring on____)
18. a) Details of verification of collateral security and evidence there of

b) Details of valuation and evidence thereof
Date verified Nature of Security Value Valued by
Insured for Rs. ______ lakhs (expiring on____)
19. Give details of the Guarantee in respect of the advance

a) Central Government Guarantee;
b) State Government Guarantee;
c) Bank Guarantee or Financial Institution Guarantee;
d) Other Guarantee
Provide the date and value of the Guarantee in respect of the above.

D.L.1
BANK AUDIT 2017-18
20. Compliance with the terms and conditions of the sanction
Terms and Conditions Compliance

i) Primary Security
a) Charge on primary security
ii) Collateral Security

a) Charge on collateral security
iii) Guarantees – Existence and execution of valid guarantees
iv) Asset coverage to the branch based upon the

arrangement (i.e , consortium or multiple-bank basis)
v) Others:
a) Submission of Stock Statements/ Quarterly
Information Statements and other Information
Statements.
b) Last inspection of the unit by the Branch officials:
Give the date and details of errors/omissions noticed
c) In case of consortium advances, whether copies of
documents executed by the company favouring the
consortium are available
d) Any other area of non-compliance with the terms and
conditions of sanction.

D.L.1
BANK AUDIT 2017-18
21. Key financial indicators for the last two years and projections for the Current year (Rs. in lakhs)
st st
Indicators Audited year ended 31 Audited year ended 31 Estimates for year ended
st
March_____ March_____ 31 March____
Turnover
Increase in turnover % over previous year
Profit before depreciation, interest and tax
Less: Interest
Net Cash Profit before tax
Less: Depreciation
Less: Tax
Net Profit after Depreciation and Tax
Net Profit to Turnover Ratio
Capital (Paid-up)
Reserves
Net Worth
Turnover to Capital Employed Ratio (The
term capital employed means the sum of
Net Worth and Long Term Liabilities)
Current Ratio
Stock Turnover Ratio
Total Outstanding Liabilities/ total Net
Worth Ratio
In case of listed companies, Market value
of shares
a) High;
b) Low; and
c) Closing
Earnings Per Share
Whether the accounts were audited?
If yes, upto what date; and are there any
audit qualifications

D.L.1
BANK AUDIT 2017-18
22. Observations on the operations in the account:

Excess over drawing power Excess over limit
1 No of occasions on which the balance

exceeded the drawing power/ sanctioned
limit (give details)
Reasons for excess drawings, if any
Whether excess drawings were reported
to the Controlling Authority and approved
Debit Summation Credit Summation (Rs. in Lakhs)
(Rs. in Lakhs)
2. Total summation in the account during
the year
Less : Interest
Balance
23. Adverse observations in other audit reports/ Inspection Reports/ Concurrent Auditor’s Report/ Internal Audit Report/ Stock Audit Report/ Special Audit
Report or Reserve Bank of India Inspection with regard to:
i) Documentation;
ii) Operations;
iii) Security/Guarantee; and
iv) Others
24. Branch Manager’s overview of the account and its operation.
25. a) In case the borrower has been identified/ classified as Non-performing Asset during the year, whether any unrealised income including income
accrued in the previous year has been accounted as income, contrary to the Income Recognition Norms.
b) Whether any action has been initiated towards recovery in respect of accounts identified/ classified as Non-performing Assets.
( Signature & Seal of Branch In-charge)

Date:

BANK BRANCH AUDIT (2017-18) D.L.2
ADDITIONAL MATTERS THAT ARE RECOMMENDED TO BE INCLUDED IN THE LONG
FORM AUDIT REPORT TO MAKE IT MORE USEFUL TO MANAGEMENT
The LFAR is not a substitute for the Main Report and all qualifications are expected to be reported in the
Main Report. Where an audit qualification is necessary in the Main Report by the Auditors, elaboration
thereof may be made in the LFAR.
___________________________________________________________________
Cash
ATM BALANCES:
 DOES THE FIGURE OF THE BALANCE IN THE BRANCH BOOKS IN RESPECT OF
CASH WITH ITS ATM(s) TALLY WITH THE AMOUNTS OF BALANCES WITH THE
RESPECTIVE ATMs, BASED ON THE YEAR END SCROLLS GENERATED BY THE
ATMs?
(The year end scrolls would not tally normally, because of the cut off time adopted
for the branch accounts, as compared to the natural date closure. More
importantly, the difference would be on account of unadjusted debit transactions in
the accounts of the card holders of the bank at the same or another branch as well
as of card holders of other banks. The difference could also be on account of cash
replenishment in the hours after the books of the branch are closed for the day but
before the end of the calendar date in the scroll at midnight. Sometime due to
technical problems in the transmission of data, the withdrawals may not get
debited immediately in the account of the customers). ATM book balances must be
in figures that correspond to the denominations in the ATM and cannot be in odd
figures.
Long outstanding items of withdrawals not recorded must be a matter of serious
concern and must be reported).
 WHERE THE BANK HAS APPPOINTED AGENTS FOR CASH REPLENISHMENT IN

THE ATMs, WHETHER THE BRANCH HOLDS PERIODIC CONFIRMATION OF
BALANCES OF CASH HELD BY SUCH AGENTS, INCLUDING, IN PARTICULAR, A
CONFIRMATION AS AT THE END OF EACH ACCOUNTING PERIOD? AND
WHETHER THE AMOUNT WITH SUCH AGENTS, IS PHYSICALLY VERIFIED AT
PERIODIC INTERVALS BY THE BRANCH OFFICIALS?
 ARE THERE ANY AMOUNTS AT DEBIT IN THE ACOUNTS OF SUCH AGENTS, IN

RESPECT OF AMOUNTS REQUIRED FOR CASH REPLENISHMENT IN THE ATMs?
If so, how are these reflected in the branch balance sheet?
(Non reconciliation, resulting in a Memorandum of Changes, should be reported in the
Main Report as well as the LFAR)
Balances with Reserve Bank of India

Where the Branch maintains an account with the Reserve Bank of India, whether the
following have been reported, through the MOC annexed to the Main Report:
a. Credits and debits originated in the RBI statement, remaining unresponded and
affecting the RBI account balance in the books of the branch.
b. Currency chest operations involving deposits and withdrawals at linked branches
prior to, but communicated to, or recorded by, the branch after the year end.
NOSTRO Accounts (maintained at the designated branches):

a. Whether the Bank has a laid down system to obtain periodic balance confirmation
of NOSTRO account balances and for their reconciliation with the book balances?
b. Whether the system of the Bank ensures that all entries appearing in the overseas
NOSTRO Accounts statements, are duly incorporated in the respective NOSTRO
Accounts maintained by the Branch?
c. Have the balances been converted at the rates of exchange applicable as at the
year end?
d. Any adverse features observed, may be reported, including in respect of closed
and dormant accounts.
Investments (where the Branch holds investments on behalf of Head Office)
Whether there are any matured or overdue investments that remain unrealized and
continue to be included in the investments portfolio? If so, give details?

Advances
Credit Appraisal
Have you come across cases of quick mortality in accounts, where the advance
became Non performing within a period of 12/24 months of appraisal/sanction? Details
of such accounts each in excess of Rs.5.00 lacs may be provided.
Documentation
Does the Branch follow the system of giving to each borrower, a copy of the
documents/agreements executed, and any changes/modifications?
Where the system has not been followed or the documents are not so furnished to the
borrowers, the same should be reported.
Review/ Monitoring/ Supervision - Stock/ book debt statements and other periodic
operational data and financial statements
a. Where there is significant divergence between the latest audited accounts (expected to be
on record), and the certified data as on the date of such latest audited statements that
indicate lack of integrity of the data/information having a bearing also on the
classification, how has similar unaudited data as at the balance sheet date been dealt
with and whether and the extent to which reliance has been placed thereon.
b. In case of NPAs with the aggregate outstandings, each in excess of Rs..5 crores, or such
lower outstandings as stipulated by the bank, has the Branch complied with the
mandatory requirements of stock audit once a year; and in respect of immovable assets
charged as security, once in three years, unless, in the opinion of the auditor,
circumstances warrant a shorter duration?
 Cases where this was required but has not done need to be reported
 Adverse features observed in the reports on which action has not been taken and
those which deserve the attention of the Management need to be reported.
Advances controlled by Central Processing Cells to which the branch under audit, is
linked
Have there been any limitations/restrictions/impediments in the audit verification procedures,
where the branch is linked to a Central Processing cell that controls lending procedures
related to appraisal, sanction, documentation, disbursement, monitoring, supervision and
control over the advances?
Liabilities
Deposits
.
 In respect of overdue/ matured term deposits, particularly those not subject to automatic
renewal, whether interest has been accrued on such deposits up to the year end,
including in respect of deceased depositors?
 Does the Branch issue Deposit Receipts to the Depositors upon receipt/ renewal of
deposits, as mandated by the Reserve bank of India? In case the Bank does not
follow this practice, the same should be incorporated in the LFAR.
 Further, where the branch has issued such Deposit Receipts but has not
despatched the same to the depositors, the number and amount thereof must be
reported, considering the attendant risks of likely misuse of such receipts.
Contingent Liabilities
Report in the Main Report and LFAR, whether and the extent to which the branch carries
contingent obligations in respect of L/Cs and guarantees which have expired and where
liability of the bank has ceased, including due to expiry of the claim period.


Whether in respect of advances treated as non performing and those where income is
not recognized, has the branch maintained adequate records and are these updated as
regards:
 Interest Suspense or similar account
 Unapplied Interest
 Right of recompense in cases of accounts subjected to restructuring,
rehabilitation, rephasement etc., particularly in cases covered by the CDR
mechanism?
GENERAL
Books and Records in the EDP Environment
Does the Branch have a system of expeditious disposal of the Daily exception reports
generated by the system?
Are there any major transactions or other pending compliances that deserve the
attention of the Management?
Audits/Inspections/Latest Reports:
Whether the following latest reports on the accounts of the Branch and
compliance by the Branch on the observations contained therein, have been
considered, in preparing the reports?:
h) Quarterly review report;
j) any special inspection/investigation report?.
Any major area of non compliance, or that deserving the attention of the management
should be reported.

DL.2.1
BANK AUDIT - MANNER IN WHICH CERTAIN MATTERS CAN BE CONSIDERED IN
THE LONG FORM AUDIT REPORT BASED ON FACTS (Illustrative Paras/formats)
INFORMATION SYSTEM/ EDP AUDIT

At the Branch, reliance has been placed on the system generated information/data in
the computerized environment based on the CBS system laid down by the Bank,
which system is stated to be followed by the Bank/branch. We are informed that the
reports of the IS audit, if any, conducted by the Bank are not available at the
Branch, but at the Head Office, to ascertain whether there are any issues and
matters that need to be addressed by the bank in connection with its financial
statements; particularly, as regards coverage of all the accounting norms as well as
RBI parameters and norms/guidelines, for the time being applicable, related to the
classification of advances for the purposes of provisioning etc. The management has
represented that all the parameters required by the regulator have been built into the
system ; and if, and the extent to which, these are not in consonance with those of
the Bank as per its own policies, or as otherwise required, these would be considered
at Head Office, to the extent these affect the Branch financial statements.
CASES OF QUICK MORTALITY WHERE ADVANCES BECAME NPA WITHIN 24 MONTHS

OF SANCTION/ APPRAISAL (Cases above Rs.10.00 lacs)
This, prima facie, reflects deficiencies in and faulty appraisal of the proposals,
including on account of technical and financial viability not having been properly
assessed or examined.
Based on a study of such cases, the causa proxima of incurrence of losses within a
short time after sanction / disbursement of advances needs to be determined and
action initiated to identify and address the deficiencies in the credit appraisal
systems and/or monitoring, that would require to be reviewed/ remedied, the
objective being to minimise such occurrences in future; and may entail imparting
appropriate staff training and equipping the personnel with the requisite skills.
Considering the nature and risk of trade, the Management may need to assess
generic provision, if any required, for cases of quick mortality, based on trends as
may be reflected over a period of time.
Given hereunder are cases, where there was an ostensible failure of the appraisal
system, resulting in quick mortality of the advances, instances of which are for
outstandings, each in excess of Rs.10.00 lacs.
NAME OF THE LIMIT DATE OF DATE OF AMOUNT
BORROWER SANCTIONED SANCTION/ NPA OUTSTANDING
(Rs) APPRAISAL (Rs.)

DL.2.1
Guidelines on Fair Practices Code for Lenders - Furnishing copy of loan agreement to
the borrowers in each case
It has been reiterated by Reserve Bank of India, vide DBR.No.Dir.BC.10/13.03.00/2015-16 dated

1.7.2015 that, to avoid any disputes with regard to the terms and conditions of grant of the
loans, the Banks should invariably furnish a copy of the loan agreement along with a copy
each of all enclosures quoted in the loan agreement to all the borrowers at the time of
sanction / disbursement of loans.
In the following cases, there is no evidence on the records of the branch, with regard to
compliance of the said RBI directives:
BRANCH Year:
Name of the Amount of limits Documents on Remarks (indicate , as applicable)
Borrower sanctioned (Rs. in record dated a. No evidence of loan documents
Lacs) handed over to the borrower
b. Consortium advance where the lead
bank has not provided copies of
the loan agreements
We advise strict compliance of the said RBI requirements.
Receiving audited accounts in the case of borrowers with limits beyond prescribed
amount:
The Bank, in the loan policy has stipulated that Reserve Bank of India has given freedom to
individual Banks to fix credit limit above which audited balance sheet has to be insisted upon
from the borrowers. The Bank has fixed limit of Rs.25 Lacs and above for submission of
audited balance sheet, and accordingly the Branch has not obtained audited statements in
case of non-corporate entities with working capital limits beyond Rs.10 Lacs .
A list of accounts where, as per the LFAR prescription, audited accounts were not obtained
from non corporate borrowers is furnished hereunder:
Name of the Non Working capital Amount Classification
corporate borrower Limits (Rs.) outstanding(Rs.) Status
Other cases where latest audited statements were not obtained or on record
Name of the borrower Limits (Rs.) Amount Classification
outstanding(Rs.) Status
a. Corporate
a. Non Corporate

DL.2.1
System and periodicity of Stock Audit

Stock Audits: In case of larger advances accounts (Limit Rs. __ crore and above) stock audit
is to be carried out by the external auditors annually.
In case of large advances accounts (Limit Rs__ Crores and above) which are showing signs
of incipient sickness and in such accounts where it is felt necessary by the bank stock audit
is to be carried out by the external auditors annually
Branch: No. of Accounts

Particulars -status of Stock Audit as on 31.03.2018
Stock Audit required to be conducted

Accounts where stock audit was conducted
Accounts where stock audit was not conducted
Reports Due
Reports Received
Reports awaited
Major adverse observations in stock audit reports

(Amount Rs. In lacs)
Name of the Limits Outstanding Nature of major adverse
borrower (Rs) balance(Rs.) observations
Review of non funded limits requiring provision, in cases of weak borrowers or those
in default:
We observe that the Bank is generally not considering or making any provisions towards the
Non funded limits in NPA cases. It needs to be understood that off-balance sheet items / non-
funded facilities need also to be recognized as credit facilities and involve risk of loss, which,
on fructification, is recorded / provided in the same manner as the loss arising out of funded
exposures. It is also to be noted that as per Accounting Standard 29 (Contingencies) issued
by ICAI, the probable loss towards the present obligations needs to be provided in the
accounts, if there are chances of the fructification of the risk of such losses. In view of the
same, the Bank needs to suitably devise its policy for recognition of such liabilities and
provisions towards the same.
At the Branch, we have come across the following cases where there may be probable
losses, due to the devolvement of the contingent obligations that relate to NPAs, with regard
to which, in the absence of any policy of the Bank or guidelines of the RBI, no provisions are
considered at the Branch, but may be considered at the Head Office.
Name of the NPA Nature of Amount Remarks

borrower to obligation likely to
whom/which non likely to devolve
funded facility is given devolve (Rs.)

DL.2.1
DUE DILIGENCE CERTIFICATE

The Bank is expected to obtain in respect of advances under consortium and multiple banking
arrangements, due diligence certificates, duly certified by a qualified Cost Accountant,
Company Secretary or a Chartered Accountant, in the form and manner specified by the
Reserve Bank of India, as also reiterated vide RBI Circular No. DBOD. No.
BP.BC.110/08.12.001/2008 -09 dated February 10, 2009.
While in the normal course, the classification of the advances is determined on the basis of
the technical prudential norms of the RBI, the objective of the due diligence exercise in the
manner required, will enable a view being taken as regards any adverse features that may
need to be considered and having effect on the financial information/ statements, and the
corresponding health classification of the related advances, particularly where there may be
signals of intrinsic weaknesses/risks that need to be addressed [including advances in special
Mention Accounts(SMA) category]
We give hereunder, instances of accounts that were not subjected to the due diligence
exercise in compliance of the said RBI Circular instructions. Where the Bank is the leader in
the arrangements, it should initiate the exercise by appointment of the qualified professionals
and obtaining for its record and consideration the due diligence report and in case the leader
in the consortium is another bank, it may request for a copy of such a report from the other
bank. The contents of such a report should be kept in view at the time of renewal/review of
the limits.
CASES OF CONSORTIUM/MULTIPLE BANKING WHERE DUE DILIGENCE CERTIFICATES WERE

NOT OBTAINED OR ON RECORD AS AT 31.3.2018
Name of the Borrower Nature of limits Amounts outstanding Classification

(Rs.) status in the
Branch
a. Where the Bank is the leader
b. Where the Bank is not the leader
EXTERNAL CREDIT RATING OF BORROWAL ACCOUNTS:

In addition to the internal rating of the Borrowal accounts based on the audited accounts,
Credit Rating of Corporate borrowers including PSUs (in case of individual exposure being
above Rs. 5 crore) by any one of the domestic Credit Rating Agencies identified by RBI and
approved by the Bank’s Board, is required to be complied by the Bank as per the New Capital
Adequacy framework.
We furnish hereunder the list of borrowers who have not obtained the external credit rating or
the validity of credit rating has expired and fresh rating not obtained.
CASES WHERE CREDIT RATING NOT OBTAINED OR EXPIRED AS AT 31-3-2018
Name of the Borrower/ branch Nature of limits Amounts Classification
outstanding (Rs.) status in the
Branch/Remarks
YET TO BE RATED
VALIDITY OF RATING EXPIRED

DL.2.1
RIGHT OF RECOMPENSE:
The Branch /Bank does not have a system to keep track of the amount of right to recompense
in case of accounts subjected to restructuring, rehabilitation etc. This is a potential loss of
revenue; and it is imperative to parameterize and review the record of the Branch to
determine the amount recoverable from borrowers which have been upgraded on grounds of
satisfactory performance, after these advances were restructured/ rehabilitated.
Change in Accounting practice as regards reversal to borrowers’ accounts of Interest

Suspense in respect of Non Performing Advances
The attention of the Management and the ACB is drawn to the Bank’s Circulars dated
_________ relating to the Prudential Norms on Income Recognition, Asset classification and
Provisioning - Computation of NPA levels.
In terms of these instructions, the reversal of accrued income remaining
uncollected/unrealized on NPAs and earlier held in Interest Suspense is credited to the
account of each related NPA account, the said component of unrealized interest to be held in
Memorandum accounts ; the effect of which is, that whereas the statements furnished to
customers were earlier on the basis of gross debits as per ledger accounts, these are now
based on balances as reduced and the statements sought to be sent accordingly, are at
lower figures. On this basis, the acknowledgement of debt by the borrowers would be on
reduced balances.
It is clear that the RBI Circular has been misinterpreted as it nowhere suggests that the
account of the borrower be credited.
The legal and other implications of this action do not appear to have been examined,
particularly as to the unrealized interest carried as such in the books, as also in cases
/matters in litigation, nor on the action required in cases of restructuring involving FITL/WCTL
etc. The risk factors also do not appear to have been addressed where the account is
identified as NPA in one year and restructuring/rehabilitation is done in the following.
The Bank needs to re examine the issue and address the risks involved, as also the effect on
the gross/net NPAs and movements therein. The issue of appropriation of recoveries in such
accounts, is also relevant to be dealt with, as will be the basis of computation of interest on
the amounts accrued.
Based on this, appropriate action needs to be taken at Head Office.
The total Interest unrealized and reversed in the accounts identified as NPAs during
the year is Rs.____________________ .
LETTERS OF COMFORT (Rs._________________):

As per past practice, amounts on account of Letters of Comfort, comprising obligations
assumed in foreign currencies, to fund the bank’s constituents under Buyers/Suppliers’
credit, have been treated as contingent in nature, and included in the Branch returns.
The Management has represented that based on a review of the documents and transactions
that the bank is not assuming the liability towards ‘Letter of Comfort’ as a funded exposure,
since it is not a loan given to the Bank, but to the bank’s constituents to meet their import
payments in terms of RBI Master Circular on Trade Credits. The Management contends that
the undertaking is akin to an undertaking ‘as a guarantor’ and ‘not as a borrower’.
The matter is not free from doubt and requires an in depth examination and the clear views of
the Reserve Bank of India and / or the Institute of Chartered Accountants of India as to the
real nature of the transactions/balances. This is particularly in view of the fact that there is
flow of funds through the Bank’s Nostro Accounts based on the letters of request /
undertaking by the Bank and acceptance / compliance thereof by the overseas
Banks/correspondents. This includes funding by the overseas branches of the Bank, which
needs to consider these transactions and balances in the consolidated financial statements
prepared by the Bank.
The matter also needs to be examined in the light of “substance over form” and in case this is
akin to borrowing of funds overseas, it would have implications on the disclosure
requirements in the Bank’s balance sheet and would also have effect on the working of the
Capital Adequacy Ratio.

DL.2.1
Banker’s Cheques/Pay Orders

We observe that as at the year end, there were outstandings in respect of Banker’s Cheques
and Pay Orders, that are not current and need to be reviewed, to determine the reasons,
including in particular, if these are represented by undespatched instruments, or wrong
retention at credit. Break up of the outstanding instruments as at the year end, is summarized
below:
Age-wise break up of No. of Entries Outstanding Amount (in Rs)

Outstandings under Banker’s Pay Banker’s Pay Orders
Banker’s Cheques/Pay Cheques Orders Cheques
Orders
Within 6 months
6 months -1 year
1-2 Years
2-3 years
3 Years above
Total
Instruments in hand/not
despatched
STATUS OF IMPLEMENTATION OF GHOSH COMMITTEE AND JILANI COMMITTEE :
Reserve Bank of India vide its letter No.BS.CO.PP.BC3/11.01.005/2000-2001 dated

29.09.2000 advised that the status of the implementation of the recommendations made by
committees chaired and convened by Sri Amitabh Ghosh on frauds and malpractices in
Banks and of Sri Rashid Jilani on internal inspection & audit system in Banks respectively,
are to be verified and commented upon by the statutory auditors in their report and
clarified subsequently to the Bank that the report is to be furnished at appropriate place.
Our verification regarding implementation of the recommendation was limited primarily to

enquiries and obtaining confirmation from the management.
The responsibility for compliance with implementation of the recommendations of the Ghosh
& Jilani Committees is that of the Management. Our responsibility is to examine the report on
the status of compliance therewith as contained in the suggested Formats , as prepared by
the management..
We have in the course of audit of the Branch, and based on a test check procedures
adopted in respect of the accounts for the year 2017, broadly reviewed the internal control
procedures of the Bank considered relevant for audit, as also arising out of the
recommendations of the Ghosh and Jilani Committees, and have relied upon the information,
explanations and management responses /assertions stated against each item in the
statement/format prepared in the formats prescribed; and, except as otherwise stated, we
have not come across anything that causes us to believe that there are any significant
/material misstatements/ assertions made, as would have effect on our opinion on the
financial statements under audit. It is not possible for us to comment on the compliance of
certain procedures that involve on the spot verification of some of the recommendations since
we are not expected to be present at the branch throughout the year to observe such
compliance.
We have not carried out an investigation into the status of compliance by / implementation of
the management with the recommendations of the Ghosh / jilani committees. Our
examination is limited to enquiries and obtaining confirmations from the management and
appropriate persons and test check of the status of recommendations.

AUDIT OF BANK BRANCH ACCOUNTS FOR 2017-18 E
NORMS ON INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING
Reference
 Part A – General Guidelines
Master Circular DBR.No.BP.BC.2/21.04.048 / 2015-
 Part B – Prudential Guidelines on Restructuring
16 dated 1.7.2015 - Prudential norms on Income
 Part C – Early recognition of financial distress
Recognition, Asset Classification and Provisioning
pertaining to Advances and also RBI Circular No.
DBR.No.BP.BC.101/21.04.048/2017-18 dated
12.2.2018 – Resolution of Stressed Assets –
Revised Framework
Master Circular DBR.No.BP.BC. 37 Provides an additional 60 days period beyond what
/21.04.048/2015-16 dated November 21, 2016 - is applicable for the concerned regulated entity
Prudential norms on Income Recognition, Asset (RE) for recognition of a loan account as sub-
Classification and Provisioning pertaining to standard in certain cases.
Advances
Master Circular DBR.No.BP.BC. 49 /21.04.048/2015- Provides an additional 30 days beyond 60 days
16 dated December 28, 2016 - Prudential norms on period applicable for the concerned regulated
Income Recognition, Asset Classification and entity (RE) for recognition of a loan account as
Provisioning pertaining to Advances sub-standard in certain cases mentioned in the
November 21, 2016 circular.
DBR.No.BP.BC.30/21.04.048/2015-16 July 16, 2015 To provide operational flexibility to credit card
(Prudential Norms on Income Recognition, Asset issuers, with effect from the date of the circular,
Classification and Provisioning pertaining to ‘past due’ status of a credit card account for the
Advances – Credit Card Accounts purpose of asset classification would be reckoned
from the payment due date mentioned in the
monthly credit card statement.
DBR.No.Dir.BC.10/13.03.00/2015-16( 1-7-2015 ) Loans and Advances – Statutory and Other
Restrictions.
Master Direction FIDD Relief Measures by Banks in Areas Affected by
No.FSD.BC.2/05.10.001/2016-17 July 1, 2016 ( Natural Calamities
Reserve Bank of India (Relief Measures by Banks
in Areas Affected by Natural Calamities)
Directions, 2016
FIDD.No.FSD.BC.52/ 05.10.001/2014-15 dated
March 25, 2015 - Guidelines for Relief Measures by
Banks in Areas Affected by Natural Calamities
Master Circular FIDD.MSME & NFS.BC.No.07/ Lending to Micro, Small & Medium Enterprises
06.02.31/2015-16 (1-7-2015) and also RBI Master (MSME) Sector
Directions FIDD.MSME & NFS.12/06.02.31/2017-18
dated 24-7-2017
FIDD.CO.Plan.BC.54/04.09.01/ 2014-15 dated April Agriculture: The distinction between direct and
23, 2015 - Priority Sector Lending-Targets and indirect agriculture is dispensed with; but defines
Classification “Farm Credit”.
Bank loans to food and agro processing units will
form part of Agriculture
FIDD.CO.FSD.BC.No 9/05.02.001/2016-17 August 4, Implementation of the Scheme for the year 2016-17
2016 (Union Budget – 2016-17 Interest Subvention for short term crop loans upto Rs 3 lakh with certain
Scheme stipulations:
FIDD. No .FSD.BC. 19/05.04.02/2016-17 December Interest Subvention Scheme for Short Term Crop
26, 2016 (Interest Subvention Scheme for Short Loans during the year 2016-17- Grant of grace
Term Crop Loans during the year 2016-17 period of 60 days beyond due date
DBR.No.CID.BC.22/20.16.003/2015-16(1-7-2015) Master Circular on Wilful Defaulters.
DBR.No.BP.BC.103/21.04.132/2015-16 dated 13-6- Scheme for Sustainable Structuring of Stressed
2016 Assets
DBR.No.BP.BC.33-34/21/04.132/2016-17 dated 10- Scheme for sustainable structuring of stressed
11-2016 assets –revisions
DBR.No.BP.BC.27/21.04.048/2015-16 dated Discount Rate for Computing Present Value of
02-07-2015 Future Cash Flows.
DBR.No.BP.BC.100/21.04.048/2017-18 dated 07-02- Relief for MSME Borrowers registered under Goods
2018 and Services Tax (GST)
Bnkad18.Sanjay v & mmk 1

1. GENERAL
It is imperative for the auditor to determine as to whether the Branch Management, has made the
appropriate classification as to the health status of the borrowal accounts, as required, based on the
minimum bench marked norms prescribed by RBI, and for the time being applicable. The Branch
auditor’s verification of Advances is a critical part of the scope of his work, requiring him to be equipped
with updated knowledge of the latest applicable legal, regulatory and accounting requirements and being
equipped with the requisite skills to exercise judgment on the appropriateness of the health status /
internal classification of the advances; including based on the documentation, operations, the capacity
of the borrower to service the credit facilities and the existence and realizable value of the security,
guarantee etc. available in the event of a default in servicing of the debt.
Provisions are made for potential losses in advances including those which may be performing
currently but are intrinsically weak/ problematic/ critical and likely to become non performing and in
default; and not capable for being serviced on the terms and conditions contractually agreed upon
between the bank and the borrower. Cases where the borrower requests for restructuring, rehabilitation,
rephasing, rescheduling, or requests for frequent enhancements without justification etc., or where
advances are observed as stressed, would require provision for the anticipated/potential detriment that
may have to be borne by the Bank.
If the auditor’s examination reveals that changes in classification are warranted and provisions required
being higher than what the management has considered , his report through the Memorandum of
Changes forming part of the Branch Audit Report, would have to deal with the same.
A gist of the prudential norms and guidance that may be helpful, is given hereunder:
2. BASIC MATTERS
It will be observed from the legal requirements of disclosure, that advances which are good and
recoverable, are required to be disclosed and the classification is based on:
a)Nature and Maturity: Remarks
 Short-term in respect of bills, overdrafts, cash credits and loans repayable on
demand etc.
 Longer term in respect of Term loans, which are expected to be given for periods
exceeding 36 months. (amounts include overdue installments)
b)Security and guarantee
 Security of tangible assets, (both primary and collaterals)and including
against book
debts treated as tangible
 Guarantee by bank/Govt. including DICGC/ECGC)/ CGFSSI
(Most of the Banks have given up DICGC coverage).
 Unsecured. Include clean loans where the bank has no security cover
c) Location in /outside India
d)Sector-wise as under
for advances in India:
 Public includes undertakings which under statutes sector are treated as
public sector
 Priority which includes public sector advances falling in priority sector
 Banks covers banks, as defined
 Others covers residual category
Advances –Nature of Fund Based

Advances comprise moneys laid out by the Bank by way of term
loans, cash credits, overdrafts, bills purchased and discounted for
the purpose of earning yields (interest/discounts etc.) and include
all the interest bearing# advances granted to employees (e.g.
Clean Loans, Housing Loans, Vehicle Loans and other Advances
other than its capacity as an Employer), normally against security
and / or guarantee and covered by appropriate documentation,
pursuant to due process procedures by way of appraisal,
sanction, documentation, etc. These also include credit card dues
and adverse balances in Deposit accounts.
(# non-interest bearing advances e.g., Festival Advances. Flood

Relief Advances to Staff etc. should not be treated as advances

but be shown under the head “Other Assets”).
Other credit facilities- non fund based

While sanctioning other fund based credit facilities, limits for non
fund based facilities are also simultaneously sanctioned by banks
and these can be divided in three broad categories , viz., Letters of
credit, Guarantees and Co-acceptance of bills/deferred payment
guarantees (such co-acceptance limits may also be sanctioned
under Bill Rediscounting Scheme of designated institutions).
Till these crystallise, the amount does not become an advance.
Types of Funded facilities The types of facilities usually provided by the banks and
provided by banks the terms normally used in connection therewith are given
in brief below:
a) Hypothecation (Stocks, book debts, other movable assets,
collateralized receivables).
b) Pledge/lock and key facility (tangible movable assets),
pledge of shares and securities .
c) Mortgage of property (Registered/Equitable), usually as
additional/collateral security
d) Trust Receipts
e) Lien marked fixed/term deposit receipts of the bank, shares
of listed companies, assignment of Life Policies, IVPs,
KVPs etc.); or clean advances, which sometimes arise due
to adverse balances in Savings/Current Accounts without
any formal authority/sanction
f) Packing credit (Pre-shipment/post-shipment) and other
Export loans.
g) Bills facilities ( Overseas and inland Bills purchased and
discounted, clean DD.'s, Advances against
bills for collection etc.).
Credit facilities involving large exposures are shared through
multiple banking by way of Consortium Advances, syndicated
loans and on the basis of participation on risk sharing/ non-
risk sharing basis)
The facilities are sanctioned, based on appraisal; and the
terms and conditions stipulated in documents , executed copies
of which need to be given to the borrowers, as per the Fair
Practices Code.
Auditor’s onerous Advances are required to be disclosed in the Balance Sheet of

responsibility banks against the subheads, at net of provision, to the
satisfaction of the auditors
Internal verification and classification of the health status of
advances is of critical importance, as correct judgement
exercised ,has direct impact on the net operating results
Internal health classification  Classification of advances needs to be done on the basis of

of advances - Objective objective criteria, which would ensure a uniform and
consistent application of the applicable norms.
 Classification is made to determine:
a. Provisioning, particularly for NPAs, based on the period for

which the Advance has remained non-performing and the
existence and availability of security and the realisable value
thereof.
Provision is made, based on Bank’s internal categorization
of the borrowal accounts as per their health

status/classification into "Standard", "Sub Standard",

"Doubtful" or "Loss" as per the Reserve Bank of India (RBI)
prudential guidelines for the time being in force, which
prescribe the minimum rates/basis of making provisions;
such provisions however, being to the satisfaction of the
auditors.
b. Income – to be generally recognized

 as accruing on advances that are categorized as
Standard/performing ; and
 on realization in case of those not
performing(categorised as Sub Standard, Doubtful or
Loss)
(Income recorded on realization, should not be
interpreted as that as per “cash basis ”of accounting).
Provisions– how reckoned a. Total provisions for the year are debited to the Profit and Loss
in the Bank's annual Account.
financial statements b. in respect of Standard Advances, which are of the nature of
Reserves, Provisions are generally considered as part of the
“Other Liabilities” in Schedule 5 of the prescribed form of the
Balance Sheet.
c. In respect of non performing advances, these are reduced
from the related sub heads under “Advances “ in Schedule 9
on the assets side of the Balance Sheet.
Broad classification as per Advance can be either:

RBI a. Standard, and though not defined , is considered as
“Performing” that does not carry risk more than the normal
banking risk; income in respect of which is recognized as
accrued on contractual terms.
b. Non Performing, which has a degree of risk , higher than
normal banking risk with the main characteristic that it is in
default in servicing as per the contractual terms and “ceases to
generate income (contractually due)”
NPA Classification- to be Except as otherwise stipulated in the IRAC norms, the health
borrower-wise, except as classification is attributed and applies to the Borrower; and the
otherwise stated most adverse health classification applicable to any account /facility
of the borrower applies to all other accounts/facilities and not only
that facility which has become irregular.
It is the borrower that is normally classified as NPA
Borrower-wise classification does not apply to:

a. Credit facility to Primary Agricultural Credit Society
(PACS) and Farmers Service Societies (FSS) under on
lending arrangement;
b. Bills Discounted against accepted LC
Criteria for identification of As per the laid down criteria an advance can become and be
advance as Non Performing reckoned as NPA , caused by defaults that are:
a. Monetary - non servicing of the advances for stipulated
periods
b. Non monetary - discipline not observed in documentation
c. Due to Erosion in value of security and frauds

Monetary Defaults as per RBI Monetary defaults are time related and involve amounts that
IRAC Norms a. “remain overdue” for stipulated period, i.e., if an
amount due to the bank under any credit facility is not paid
on the due date fixed* by the bank;
or
b. “become out of order”, as stated hereunder, and applies to
cash credit/overdraft accounts
*Interest on various loan accounts is normally debited monthly,
and interest should be considered as falling due for payment on
the date of debit, unless otherwise contractually agreed. Where the
due date is frequently changed to accommodate the borrower to
avoid the account becoming NPA, the same needs serious
consideration.
*Installment falls due for payment as per terms of sanction.
In cases of loans to staff, education loans and certain other
advances, the interest /installment amount falls due for payment
only after the expiry of the stipulated period.
(As per Para 4.2.12 of the RBI Master Circular dated 1-7-2015)in
the case of advances for industrial projects or for agricultural
plantations etc. where the bank allows moratorium for payment of
interest, such interest though accruing contractually, is not due till
the gestation /moratorium period is over).
Non Performing Advances An account (Cash credit/overdraft) should be treated as òut of
a. Loan or Advance (Cash order ' and will be categorised as NPA, if any of the following
Credits, overdrafts) conditions is satisfied:
i. Where the outstanding balance remains continuously
in excess of the sanctioned limit/drawing power;
OR
ii. Even though the outstanding balance in the principal
operating account is less than sanctioned
limit/drawing power, but
a. there are no credits continuously for more than 90
days as on the date of Balance Sheet, or
b. the credits are not enough to cover the interest
debited
during the same period.
Exceptions
- Loans with moratorium for payment of interest
- Housing Loan or similar advance to staff
b. Bills Purchased and Bill remains overdue for a Discounted period by more than 90
discounted days.
c. Cash Credit Accounts If the account is ‘out of order’.
d. Derivative Transaction Overdue receivables representing positive mark to market value of
a derivative contract remaining unpaid for a period of 90 days from
specified due date.
e. Liquidity facility Remains outstanding for more than 90 days in respect of
Securitisation transaction.
f. Credit Card dues The minimum amount payable is not paid within 90 days from the
next statement date
g. Agricultural Advances Interest or installment remains overdue for
- two crop seasons for short duration crop,
- one crop season for long duration crop.
Definitions
Crop season – ‘period up to harvesting of crops raised’ as
determined by SLBC
Long duration crop – Crops wherein crop season is more than 12
months

Discretion to reschedule Banks have discretion of rescheduling the agricultural advances in

agricultural advances case of natural calamities, which impair repaying capacity
(Master Direction dated July 01, 2016)
Guidelines for relief Natural Calamities -12 types of natural calamities are defined
measures by banks in Institutional framework – Banks need to have blueprint of action
areas affected by natural plan with adequate delegation of powers with discretionary powers
calamity granted to Divisional / Zonal Managers, to ensure assistance
provided without loss of time.
Meeting of SLBC / District Consultative Committee
Immediate conveying of meeting by:

- If calamity covers entire state …. SLBC
- If small part of the state …. District Consultative Committee
Declaration of natural calamity-Domain of Sovereign (Central / State

Government) - Assessed Crop loss should be 33% or more
Restructuring / rescheduling of existing loans
- Agricultural Loans -Short Term /Long Term

- Other Loans
Short Term Agricultural Loans
Eligibility(Loan should not be overdue at the time of occurrence of

natural calamity)
Crop Loss Maximum repayment period extension

(incl. of moratorium period)
33% to 50% 2 Years
50% or more 5 Years
Other conditions
Moratorium period – at least 1 year
Collateral security – no insistence on additional
Long Term Agricultural Loans

If Only Crops are damaged and productive assets are not damaged
- Reschedule installment during the year of natural calamity
and extension of loan period by one year
- Willful defaulted installments not eligible for rescheduling
- Payment of interest may be postponed
If Productive Assets are damaged

Repayment period can be restructured provided generally it should
not exceed 5 years
Asset Classification
- Restructured portion to be considered as current dues
- Un-restructured portion to be governed by original terms
and conditions
- Additional finance to be treated as ‘Standard Asset’
- Second restructuring would not considered as ‘repeated
restructuring’
Insurance Proceeds
To be adjusted against restructured loans wherein fresh loans are
granted.

Other criteria for  Erosion in Value - Where realisable value of security is less
classification as NPA than 50% of the value assessed (by bank or value accepted in
last RBI Inspection), account to be straightaway classified as
Doubtful Asset.
 Where realisable value (as assessed by Bank / Valuer / RBI
Inspector) of security is less than 10% of outstanding balance,
account to be straightaway classified as Loss Asset.
 Fraud – treat as a Loss asset ( and as per IRAC norms, 100%
isto be provided irrespective of security, spread over 4 quarters
commencing from the quarter in which fraud has been
detected.If not reported to RBI, 100% to be provided instantly)
Note: This deserves full provision as per appropriate audit
procedures.
 Solitary or few credit entries recorded at year end and
intended to regularise the account, to be taken seriously to
determine inherent weakness in the account calling for
reclassification as NPA
Selection of advances for Basis of selection of Advances accounts to be examined
verification (Reference may be made to Section C 1 of the Audit Programme)
Examination/audit Banks have a system of appraisal, sanction, documentation and
verification of Advances disbursal of credit facilities, as per monetary limits, in the form of
to determine the health Bills purchased and discounted, cash credit, overdrafts, and term
status in the light of IRAC loans, that are covered by security and guarantee, in the event of
Norms a default by the borrower. The Banks also have internal control
systems and procedures for accounting and accountability , which
include monitoring and supervision to ensure that advances are
good and recoverable and are being serviced as per the terms and
conditions on which these were sanctioned. The Management
ensures that advances are given as per the banking norms, and in
compliance of the statutory and regulatory impositions for the time
being applicable.
It is imperative that the audit procedures cover, in depth, in
respect of the advances selected for verification, the
following:
a) Documentation
-particular to the status of the borrower
(individual/firm/company/Society/ Trust etc.)
-particular to the nature of security (pledge,
hypothecation, mortgage, lien etc.)
b) Operations -whether the account of the borrower is

stagnant or there is a healthy turnover, based on
his business operations and considering the purpose
for which the facilities are granted; and whether all
terms and conditions of sanction are complied with
c)Security/ guarantee
the existence and market value of the tangible assets/security
(primary /collateral) that will secure the bank in the event of
default in servicing of the loans/advances; and the nature and
extent of any guarantee cover available that also provides the
bank a room for fall back to recover the amounts in default.
d) Advance -the balance and correctness of outstanding as at

the year- end.

SECURITY AND GUARANTEE Security

The existence, the market value and the realisabilty of the
security (primary or collaterals) assume importance particularly
in cases where the accounts become non performing and for
determining as to whether the outstandings are in excess of
the limits/drawing power.
Applicability of margins to the value of the declared security (and
the importance of determining the realistic realisable value
thereof) need to be appropriately considered, particularly
advances where there is hypothecation of inventories, warehouse
receipts, perishable goods pledged, as also certain types of
assets like gold jewellery/diamonds etc.(which may require
specialists for valuation)
Primary as well as collateral securities must be considered for
valuation. The existence and valuation as at or near the year-
end is relevant.
Valuation Reports may be more relevant in NPA Accounts and
the periodicity at which these are obtained may be ascertained,
and a reasonable periodic interval normally accepted.
RBI has made it mandatory that in case of NPAs with
balances in excess of Rs.5 crores:
- Stock audit be got done by external agencies once a year;
and
- Collaterals (immovable properties) be got valued once in
three years by valuers.
The latest Stock Statements, as near the Balance Sheet date,
should be called for and be considered. A view may also emerge
based on the comparison of the latest audited financial
statements and the financial data submitted corresponding to the
date of such statements (say, for the earlier year), to see if there
are any major deviations therein, as provoke an enquiry. Such
reports must be examined.
Visits to godowns to verify stocks:
It may normally not be necessary to visit the godowns for
verification of stocks where the operations in the accounts are
regular and healthy and there is reasonable evidence on record
that inspections have been made at periodic intervals and the
existence and market value of security are not in doubt e.g.
where Godown Registers so indicate, and there is no adverse
finding
Computation of Drawing In respect of credit facilities against hypothecation of stocks
Power/Limits in respect of (inventories) being the primary security, the Bank’s system of
stocks hypothecated appraisal for determining the maximum permissible finance to
borrowers and fixing of limits, inter alia, should generally take into
consideration the level of sundry creditors (comprising ‘unpaid for’
stocks). The sanction is expected to be in tune with the appraisal
so made.
The thrust of the RBI guidelines is avoidance of double
financing on the unpaid stocks, if such stocks are taken as
eligible for computation of drawing power.
The Bank’s policy must be reviewed, if it constitutes an inherent
weakness in the credit system, where the stringency in appraisal,
is relaxed while sanctioning the advances, having consequential
effect on monitoring and supervision, and may have effect on the
classification status of the Borrower, where the drawing power falls
short of the outstanding.

In granting working capital limits, Banks usually consider

credit facilities by way of Hypothecation of stocks and a
charge on the sundry debtors.
For the purposes of classification of advances, the
computation of drawing power based on realistic value of
hypothecated stocks (net of unpaid for stocks, whether
covered by LCs/ Guarantees/ Co-acceptances or otherwise)
and margin as stipulated, is vital, particularly in cases of
default, and in border-line cases where the health status of
borrowers may be in question, to gauge slippages.
(Reserve Bank of India directive No. IECD.No.32/08.10.01/92-93
th
dated 28 April, 1993 may be referred to). For convenience of
understanding, the illustrative example may be seen in Section P,
as to the method of computation of the DP.
In consortium accounts, the DP as computed by the leader
bank should not be acceptable, if it is not in consonance with
the terms of sanction of the bank; or if the computation is
incorrect as to facts.
Book Debts, though not a tangible security, are required by RBI,

to be disclosed in the financial statements as “Secured by
tangible securities”, with a suitable narration, in the annual
accounts. For computation of DP, the Book Debts that are
current and permissible ( good and recoverable) , should be
considered.
Collateralised intangibles like authorizations, licenses etc. are
to be treated as unsecured and disclosed separately.
Surplus of the securities over the first charge can be considered as

security in cases where 2nd charge has been created in favour of
the Bank, and there is reasonable certainty that upon satisfaction
of the first charge, such surplus can be available.
The realisable value of other securities should also be taken into

account. These would include realisable value of LIC Policies
assigned , lien marked Fixed Deposits of the Bank, shares and
other approved securities.
If security comprises gold jewellery/ornaments/diamonds, it may
be appropriate to consider the valuation by an expert on whom
reliance may be placed.
Gold loans are usually against the security kept in sealed
pouches which should not be got opened; and their contents and
valuation accepted.
Whether or not a realistic view is being taken as to existence and
value of securities and collaterals, can be guaged for instance
from a reference to the latest audited statements and comparison
of the information therein with that in the QIS/Other returns. If “one
time settlement” proposals, where the value at the time of
appraisals/renewals is higher than for the settlement purposes, it
would cast doubts on the appraisal systems that need to be
commented upon in the LFAR.
The auditor needs to be satisfied as to the adequacy and
effectiveness of the system of verification by the Management
as to the existence and relisable value of the stocks and
debtors; and to ensure that there is no default in the account
due to limits/DP being breached.

Exceptions/clarifications  Advances against term deposits, NSCs, IVPs, KVPs and Life
Insurance Policies need not be treated as NPAs, till security
cover is sufficient to cover outstanding balance.
(Income to be recognised subject to availability of margin)
 Advance against gold ornaments / Government securities not
exempt.
 Central Government guaranteed advance to be classified as
NPA only if Government repudiates the guarantee when
invoked.(Income to be recognized only on realization if NPA as
per applicable criteria)
 Consortium Advances
-Member banks shall classify the accounts according to their
own record of recovery.
-Bank needs to arrange to get their share of recovery or obtain
an express consent from the Lead Bank otherwise the account
in such deprived banks might be treated as NPA for non-
servicing.
Selection of advances for Basis of selection of Advances accounts to be examined
verification (Reference may be made to Section C 1 of the Audit Programme)
Classification of accounts a. Standard

b. NPA
. Sub standard
. Doubtful
. Loss
Sub-standard Asset A sub-standard asset is one which has been classified as NPA for a
period not exceeding 12 months. Such an asset will have well
defined credit weaknesses that jeopardise the liquidation of the debt
and are characterized by a distinct possibility that the bank will
sustain some loss if the deficiencies are not corrected.
Doubtful Asset A doubtful asset is one which has remained NPA for a period
exceeding 12 months.
Such an asset has all the characteristics of a sub-standard asset
with the additional characteristic that, on the basis of currently
known facts, conditions and values, the recoveries may be highly
questionable and improbable.
In the case of erosion in the value of the security where the
assessed realizable value of the securities has a significant
shortfall – 50% or more, the asset would necessarily have to be
included as Doubtful and provided for – Refer Para 4.2.9 (i)(a) of
the Master Circular dated 1.7.2015.
Loss Asset A Loss Asset (irrespective of the period elapsed since its
sanction/disbursal), is one where loss has been identified by:
a) the bank, or
b) the internal or external auditors, or
c) the RBI Inspection,
but the amount has not been written off, wholly or partly; and
such an asset is considered uncollectible and of such little
value that its continuance as a bankable asset is not warranted,
although there may be some salvage or recovery value.
In the case of erosion in the value of the security or frauds

committed by the borrowers where the realizable value of the
security as assessed by the Bank/approved valuers/RBI is less
than 10% of the outstanding, the asset would be treated as Loss
asset – Refer Para 4.2.9 (i)(b) of the Master Circular dated
1.7.2015.

Migration of advances to a A borrowal account may migrate to a more adverse category

more adverse category, if within less than the normal stipulated retention period in
justified by facts each classification status, where conditions so warrant and
if the account is observed as intrinsically weak on facts or
evidence, and deserves a higher provision/write off
(including prudential /technical write off).
Upgrading the health The health classification can be upgraded only on remedying
classification the default that caused the account to be downgraded; the
account may not be down graded, only as permitted by the
RBI Circulars.
Temporary deficiencies in irregular/overdrawn accounts can also
be cured if all amounts in default are paid out of genuine
sources and not being stray instances of credits.
As per AS 5, recoveries subsequent to the year end and other
remedial action, will not have
Credit Guarantee Most banks have opted out of the DICGC Scheme.
(ECGC/DICGC/CGTMSE) In respect of doubtful advances against Credit Guarantee
ECGC , or Credit Guarantee Fund Trust For Micro And Small
Enterprises (CGTMSE) or Credit Risk Guarantee Fund Trust for
Low Income Housing (CRGFTLIH), i.e., other than in “ Sub
Standard” category), no provision is made to the extent of credit
guarantee cover available, even if claim is not invoked, as
illustrated hereunder:
Illustrative computation Amount – Rs. In lacs

Credit Guarantee Total
secured Guaranteed Unsecured Computation of Guaranteed
Organisation (Doubtful II)
as a % of Loan less the
secured portion
Advance against 50% of 2.50 (4.00 minus1.50)
4.00 1.50 1.25 1.25
ECGC
Provision
1.85 0.60 (*40%) Nil 1.25 (100%)
Balance in Balance
2.15 0.90 1.25 Nil
Sheet
Advance against 75% of 10.00 = 7.50
10.00 1.50 6.38 2.12 Or
CGTMSE or
CRGFTLIH 75% of 8.50 (10.00-1.50) = 6.38
Or = 37.50
whichever is least
Provision
2.72 0.60(*40%) Nil 2.12 (100%)
Balance in Balance
7.28 0.90 6.38 Nil
sheet
Resolution of Stressed Assets While Circulars, for the time being applicable to the Banks as to
– Revised Framework IRAC norms are relevant and explained, the revision in guidelines
in Para 13 below need to be kept in view as it involves revision
and repeal of some circulars.

3. SPECIAL CONSIDERATIONS:
a. Consortium Advances
In case, based on the Due Diligence Reports, expected to be on record of the Bank, the accounts are
problematic, the auditor may take a view on the classification/provisioning.
b. Apportioned Limits/Transfer of accounts from others branches:
- In respect of apportioned limits:
The Asset Classification adopted by the Main branch should be adopted by all other branches. If
a branch has got apportioned limit, it needs to ascertain the Asset Classification from the Main branch.
If the branch has apportioned limit to other branches, the Asset Classification has to be done
taking into consideration the overall position in the account with all the branches. The main branch
should inform the Asset Classification to the respective branches before the year-end.
- Advances transferred from other branches:
In case where a borrowal account is transferred from another branch, the status and operations of the
account in the pre-transfer period needs to be ascertained to determine the effect thereof on
classification.
c. Loans Granted under Government Sponsored Schemes
For loans granted under Government sponsored schemes such as SEEUY, PMRY etc. the assets
created out of Bank finance and the subsidy received from the Government and kept under
Deposit/Sundry Liabilities are available as securities besides credit guarantee cover under DICGC
wherever eligible. Hence NPA, if any, under this category shall be either sub-standard (if adequate
security cover is available including subsidy) or doubtful, and not a loss asset.
d. Back-ended subsidies if received under certain schemes, are expected to be treated not as
Deposits, but as a liability under the head “Other Liabilities” till such time as these can be
appropriated towards the last installment of the Term Loan, if in “Standard” category.
If an NPA, the loan would have to suffer a provision at its gross value i.e. without adjustment of the
subsidy or its being treated as a security. No interest can be charged on Advances to the extent
of such subsidy received.
e. Post-shipment Supplier’s Credit:
Where ECGC cover is available and any guarantee is invoked after the exporter files a claim with
ECGC, EXIM Bank would pay to the Bank, the guaranteed amount within 30 days. The advance, to
the extent of such receipt shall not be NPA.
f. Devolved LCs/Guarantees
In respect of LCs/Guarantees issued, where the beneficiary invokes the guarantee/LC, the Bank
makes payment to the beneficiary, such amounts are due for payment immediately and the
composite balance in the related facility should be considered for assessment of the status of
the borrower. In case the amount is not recovered even after 90 days such accounts are to be
classified as Non-performing assets.
4. PROVISIONING UNDER THE PRUDENTIAL NORMS AND OTHER MATTERS

Once the health classification is determined for each category of advances, the rates of
provision are applicable as per the prudential norms; and these are subject to the following
considerations.
Provisions in special circumstances:
a. Advances granted under rehabilitation packages approved by BIFR / term lending
institutions (TLIs)- Provisions:
Where additional facilities are granted to a unit under rehabilitation packages approved
by BIFR, term-lending institutions or the bank (on its own or under a consortium
arrangement), provision should continue to be made for the dues in respect of existing credit
facilities (on existing asset classification as “sub standard” or “doubtful”).
As regards the additional facilities, provision need not be made for a period of one year
from the date of disbursement in respect of additional facilities sanctioned under
rehabilitation packages
i. in respect of SSI units and Micro and Small Enterprises (MSME), identified as sick [as
defined in Section IV (Para 4.6) of circular FIDD.MSME & NFS.BC.No.07/06.02.31/2015-16
dated 1-7-2015 read with circular RPCD.SME&NFS.BC.No.3/06.02.31/2014-15 dated July 1,
2014 ]

ii. for other Units approved by BIFR/term-lending institutions.
SSI/MSME Units (sickness and rehabilitation): In view of the recommendations of Working

Group/Committee on rehabilitation of potentially viable sick units regarding changing the definition
of sickness and the procedure for assessing the viability of sick MSE units,revised guidelines for
rehabilitation of sick units were issued vide RBI circular RPCD.CO.MSME & NFS.BC.40/06.02.31/
2012-2013 dated 1-11- 2012; the objective being to hasten the process of identification of a unit
as sick, early detection of incipient sickness, and to lay down a procedure to be adopted by banks
before declaring a unit as unviable. As per the guidelines:
i. a Micro or Small Enterprise (as defined in the MSMED Act 2006) may be said to have
become Sick, if
(a) any of the borrowal account of the enterprise remains NPA for three months or more
OR
(b) there is erosion in the net worth due to accumulated losses to the extent of 50% of its
net worth during the previous accounting year.
ii. Procedures to be adopted before declaring any unit as unviable, involve the decision on
viability of the unit being taken well within 3 months of the unit becoming sick and the
rehabilitation package being fully implemented within six months from the date the unit is
declared as 'potentially viable' / 'viable'.
Vide RBI circular RPCD. MSME & NFS. BC.No. 20/06.02.31/2012-13 dated 1.8. 2012, RBI
had advised banks to either separately set up special cells at their branches, or vertically
integrate this function in the Financial Literacy Centres (FLCs) set up by them; and for the
bank staff being trained through customised training programs to meet the specific needs of
the sector.
Vide RBI circular RPCD.MSME&NFS.BC.No.74/06.02.31/2012-13 dated May 9, 2013.
detailed guidelines were issued for structured mechanism for monitoring the credit growth
to the MSE sector, to strengthen their existing systems of monitoring credit growth and put
in place a system-driven comprehensive performance management information system
(MIS) at every supervisory level; to put in place a system of e-tracking of MSE loan
applications and monitor the loan application disposal process in banks, giving branch-wise,
region-wise, zone-wise and State-wise positions; and monitor timely rehabilitation of sick
MSE units.
As per Para 32 of the Master Circular ,Entities reported as non-cooperative, any fresh
exposure will by implication entail higher provisioning.. However, for the purpose of asset
classification and income recognition, the new loans would be treated as standard assets.
b. Advances against Term Deposits of the Bank, NSCs eligible for surrender, IVPs, KVPs and
Life policies assigned to the Bank
While (as per Para 4.2.11 of RBI Master Circular),advances against term deposits, NSCs eligible
for surrender, IVPs, KVPs and life policies need not be treated as NPAs, provided adequate
margin is available in the accounts, such advances would attract provisioning requirements as
applicable to their asset classification status (refer Para 5.9.2). Cases where the year- end
outstanding is higher than the realizable security, or where margin is not available, must be
looked into by auditors.
c. Advances against gold ornaments, Govt. and all other kinds of securities are to be
classified based on their health status and are not exempted from provisioning requirements
(Refer Para 4.2.11 of the Master Circular).
d. Advances subject to Restructuring -covered by Part B of the RBI Master Circular, where the
classification status of accounts needs to be examined, including those where proposals/
applications received are pending in the following categories:
 industrial units.
 industrial units under the Corporate Debt Restructuring (CDR) Mechanism
 Small and Medium Enterprises (SMEs)
 all other advances.

Restructuring, includes rescheduling, rehabilitation, nursing etc., based on change in

contractual terms of the loan , which are in the nature of financial concessions , including by way of
reduction in the rate of interest and / or reschedulement of the repayment of principal amount. This
results in erosion/diminution in the fair value of the advance (an economic loss for the bank)
which should be computed as the difference between the fair value of the loan before and after
restructuring, to appropriately reflect the impairment due to deterioration in the credit quality of
the loan.
Such diminution in fair value of restructured accounts needs to be correctly computed as it
will have a bearing not only on the provisioning required to be made by the bank but also on
the amount of sacrifice required from the promoters.
Restructuring may involve the improving of cash flows to the borrower by way of funded interest term
loan (FITL) or working capital term loan (WCTL), essentially comprising interest and amounts in
default in servicing of loans. Whenever the unrealised interest income of a loan is converted
into FITL / Debt or equity instrument, banks must have a corresponding credit in an account
styled as "Sundry Liabilities Account (Interest Capitalization)”; and the same cannot be
considered as income.
For the purpose of arriving at the erosion in the fair value, the NPV calculation of the portion of
principal not converted into debt/equity has to be carried out separately. However, the total sacrifice
involved for the bank would be NPV of the above portion plus valuation loss on account of
conversion into debt/equity instruments. Only on repayment in case of FITL or sale / redemption
proceeds of the debt / equity instruments, the amount received will be recognized as income,
while simultaneously reducing the balance in the "Sundry Liabilities Account (Interest
Capitalisation)".
Provision for sacrifice has to be retained in separate accounts, with distinction for Standard/ NPA
accounts for appropriate disclosure in the balance sheet of the Bank.
As per para 4.2.5 with regard to upgrading of a restructured/ rescheduled account which
is classified as NPA, contents of paragraphs 17.2 and 20.2 in the Part B of the circular will be
applicable.
It would be necessary to obtain a list of borrowal accounts in each category, where
restructuring has been done or is pending as at the year end to ascertain as to whether the
bank has complied with the regulatory requirements and the classification is justified both for
completed proposals and those pending. It also needs to be examined as to whether the
classification for the previously completed proposal will undergo a change because of
compliance or otherwise resulting in upgradatation or downgradation respectively of the
borrowal account.
Where Accounts are upgraded based on satisfactory performance, it is necessary for the bank to
recover its sacrifice by way of the exercise of its right of recompense, which is usually a
contractual pre condition, particularly in cases covered by the CDR mechanism.
Accounts where there was rehabilitation/ rescheduling/ restructuring, rephasing indicating in each
case, the number of times the same has been done, is relevant information to ensure that there is
no evergreening of the advances to keep them afloat as performing.
While making provision for normal classification the amounts (present value of principal and interest
receivable as per restructured loan terms) considered as Fully Secured and covered by the value of
tangible security (primary as well as collateral), duly charged in the Bank’s favour in respect of those
dues, it needs to be ascertained as to whether for this purpose guarantees of the following
types(which are otherwise intangible by nature) are treated on par with tangible security:
i) bank guarantees and (ii) State and Central Government Guarantees
Post restructuring, for Balance sheet purposes, these need to be treated as intangibles and
not tangible security.

In cases covered in Part B – Para 19, of the RBI Master Circular, where pursuant to restructuring,
part of the principal and/or interest unrealized and/or in default is converted to investments by the
Bank, including where borrowers were granted funded interest term loan facilities, it needs to be
determined as to whether the prudential norms have been followed for provisioning and income
recognition.
Besides provisioning based on the normal health classification , banks have to make
provision for the sacrifice for diminution in the fair value of restructured advances
consequent upon reduction in the rate of interest and / or reschedulement of the repayment of
principal amount or adverse change in the earlier contractual terms .
In cases of restructuring, the provisions to be segregated for Standard and Non Performing
Advances (for appropriate disclosure in the Balance Sheet), shall comprise:
i) Normal provision as per the prescription contained in the prudential norms based on the year
end classification of such accounts that are subject to restructuring, including pending
disposal of the proposals;
ii) #Provision for the sacrifice or estimated sacrifice for pending proposals as per Para 17.4.2
; and
iii) FITL carved out of the amounts of interest in default; and fully provided for, even if
upgraded.
# required to be retained in a special designated account
(Total provision shall not exceed 100% of the advance)
e. Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries
(Loans sanctioned after July 15, 2014 – refer Para 10 of the Master Circular, provisions of
which are summarized hereunder)
Subject to fundamental viability of the project based on the requisite financial and non-financial
parameters, ( acceptable level of interest coverage ratio (EBIDTA / Interest payout), indicating
capacity /ability to service the loan over the tenor of the loan, RBI has no objection to banks’
@
financing of long term projects in infrastructure and core industries sector ; by allowing Amortisation
Schedule, say 25 years (within the useful life / concession period of the project) with periodic
refinancing (Refinancing Debt Facility) of balance debt, the tenor of which could be fixed at the time
of each refinancing, within the overall amortisation period and with Initial Debt Facility for 5 years
with refinancing of balance debt being allowed by existing or new banks (Refinancing Debt Facility)
or through bonds.
@
[ as defined under the Harmonised Master List of Infrastructure of RBI, and projects in core
industries sector, included in the Index of Eight Core Industries published by the Ministry of
Commerce and Industry, Government of India, (viz., coal, crude oil, natural gas, petroleum refinery
products, fertilisers, steel (Alloy + Non Alloy), cement and electricity - some of these sectors such as
fertilisers, electricity generation, distribution and transmission, etc. are also included in the
Harmonised Master List of Infrastructure sub-sectors) - will qualify for such refinancing also refer RBI
Circular No. DBR.BP.BC.No.42/08.12.014/2016-17 dated 1-12-12016 on definition of 'Infrastructure Lending' ].
Banks shall fix Original Amortisation Schedule , the tenor of which should not be more than 80%
(leaving a tail of 20%) of the initial concession period in case of infrastructure projects under public
private partnership (PPP) model; or 80% of the initial economic life envisaged at the time of project
appraisal :
 for determining the user charges / tariff in case of non-PPP infrastructure projects; or
 by Lenders Independent Engineer in the case of other core industries projects;
Initial Debt Facility can be say 5 to 7 years for the initial construction period and the commencement
of commercial operations (DCCO) , repayment whereof being structured as a bullet repayment, , for
refinancing by the same lender or new lenders, through bonds as a Refinancing Debt Facility, which
will be repeated till the end of the Amortisation Schedule. Unless there is an extension of DCCO
(covered by paragraph 4.2.15 of the Master Circular), the repayment of Initial Debt Facility should
be adhered to; and the Amortisation Schedule being modified once during the course of the loan
(after DCCO) without being treated as ‘restructuring’ provided:
 The loan is a standard loan as on the date of change of Amortisation Schedule;
 Net present value of the loan remains the same before and after the change in Amortisation
Schedule; and
 The entire outstanding debt amortisation is scheduled within 85% of the economic life of the project

No further finance is permitted if the Initial Debt Facility or Refinancing Debt Facility becomes
NPA at any stage, till the classification is remedied. Pricing of the funding will be risk based
but not below the bank’s Base Rate
f. Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries (Loans
sanctioned before July 15, 2014 – see Para 11 of the Master Circular)
Banks, can flexibly structure the existing project term loans to projects, in which the aggregate
exposure of all institutional lenders exceeds Rs.500 crore (sanctioned before July 15, 2014) to
infrastructure projects and core industries projects as defined (and viable as reassessed and vetted
by the Independent Evaluation Committee constituted under the aegis of the Framework for
Revitalising Distressed Assets in the Economy) as per the norms given below:
A fresh Loan Amortisation Schedule (for the existing project loans once during the life time of the
project, after the date of commencement of commercial operations (DCCO), based on the
reassessment of the project cash flows), can be fixed provided it is ‘standard’ on the date of change
of loan amortisation schedule and NPV of the loan continues unchanged before and after the loan
amortisation schedule, without this being treated as ‘restructuring’ .
The Fresh Loan Amortisation Schedule should be within 85 per cent (leaving a tail of 15 per cent) of
the initial concession period in case of infrastructure projects under PPP model; or 85 per cent of the
initial economic life envisaged at the time of project appraisal for determining the user charges / tariff
in case of non-PPP infrastructure projects; or 85 per cent of the initial economic life envisaged at the
time of project appraisal by Lenders Independent Engineer in the case of other core industries
projects; and
A ‘restructured standard’ asset as on the date of fixing the Fresh Loan Amortisation Schedule will
not be regarded as ‘repeated restructuring’ and should continue to be classified as ‘restructured
standard’ asset.
Banks can refinance the term loan periodically (say 5 to 7 years) after the project has commenced
commercial operations. The repayment(s) at the end of each refinancing period (equal in value to the
remaining residual payments corresponding to the Fresh Loan Amortisation Schedule) could be
structured as a bullet repayment, with the intent specified up front that it will be refinanced. The
refinance may be taken up by the same lender or a set of new lenders, or combination of both, or by
issue of corporate bond, as refinancing debt facility, and such refinancing may repeat till the end of
the Fresh Loan Amortisation Schedule. The condition of net present value would not be applicable at
the time of refinancing of the loan.
Longer loan amortisation of flexible structuring of project loans to existing project loans to
infrastructure and core industries projects which are classified as ‘non-performing assets’, can be
provided, to be treated as ‘restructuring’ and ‘non-performing asset’ and to be upgraded only on
satisfactory performance during the ‘specified period’ (as defined in the extant prudential guidelines
on restructuring of accounts), i.e. principal and interest on all facilities in the account are serviced as
per terms of payment during that period. However, periodic refinance facility would be permitted only
when the account is classified as ‘standard’
The exercise of flexible structuring and refinancing should be carried out only after DCCO.
Project loans in the infrastructure sector and core industries sector can also be refinanced under
subject to certain conditions stipulated and the guidelines are mutually exclusive.
g. Refinancing of Project Loans – (Para 12 of the Master Circular)
Based on the ‘Key Concepts’ in Annex 5 of the Master Circular, a restructured account is one
where the bank, for economic or legal reasons relating to the borrower's financial difficulty, grants to
the borrower concessions that the bank would not otherwise consider. involves modification of
terms of the advances/securities, the alteration of repayment period/repayable amount/ the amount
of instalments /rate of interest (due to reasons other than competitive reasons).

Banks can refinance any existing infrastructure and other project ‘standard’ loans (not
restructured in the past), by way of take-out financing, even without a pre-determined agreement
with other banks / FIs, and fix a longer repayment period, and the same would not be considered
as restructuring if such loans substantially taken over (more than 50% of the outstanding loan by
value) from the existing financing banks/Financial institutions where the repayment period should
be fixed by taking into account the life cycle of the project and cash flows from the project.
In respect of existing project loans, where the aggregate exposure of all institutional lenders to such
project is at a minimum of Rs.1,000 crore; banks may refinance such loans by way of full or partial
take-out financing, even without a pre-determined agreement with other banks / FIs, and fix a longer
repayment period, without treating the exercise as restructuring in the books of the existing as well
as taking over lenders, if the following conditions are satisfied:
i.The project should have started commercial operation after achieving Date of Commencement
of Commercial Operation (DCCO) @;
ii.The repayment period should be fixed by taking into account the life cycle of and cash flows
from the project, and, Boards of the existing and new banks should be satisfied with the viability
of the project. Further, the total repayment period should not exceed 85% of the initial economic
life of the project / concession period in the case of PPP projects;
iii.Such loans should be ‘standard’ in the books of the existing banks at the time of the refinancing;
iv.In case of partial take-out, a significant amount of the loan (a minimum 25% of the outstanding
loan by value) should be taken over by a new set of lenders from the existing financing
banks/Financial Institutions; and
v.The promoters should bring in additional equity, if required, so as to reduce the debt to make the
current debt-equity ratio and Debt Service Coverage Ratio (DSCR) of the project loan
acceptable to the banks.
vi.The above facility will be available only once during the life of the existing project loans. The refinancing
of existing project loans not meeting the conditions mentioned at (i) to (v) above will continue to be
governed by the instructions in that the repayment period should be fixed by taking into account the life
cycle of the project and cash flows from the project.
A lender who has extended only working capital finance for a project may be treated as 'new lender' for
taking over a part of the project term loan.
@ If the original loan was a composite loan with various components each being for different projects
under implementation, the DCCO may be on different dates and if DCCO has not been achieved for some
of the projects, it may be difficult to accept that refinancing is acceptable.
h. Formation of Joint Lenders’ Forum:
As per para 26 of the master circular dated 1-7-2015, as proposed in paragraph 2.1.1 of the Framework,
before a loan account turns into a NPA, banks are required to identify incipient stress in the account by
creating three sub-categories under the Special Mention Account (SMA) category as given in the table below
(Refer also Section E I) :
SMA Sub-categories Basis for classification
SMA-0 Principal or interest payment not overdue for more than 30 days
but account showing signs of incipient stress (Please see Appendix to
Part C)
SMA-1 Principal or interest payment overdue between 31-60 days
SMA-2 Principal or interest payment overdue between 61-90 days
i. Special Regulatory Treatment for Asset Classification (Extracts from the Master Circular
(emphasis in bold for attention)
“20. Special Regulatory Treatment for Asset Classification
20.1 The special regulatory treatment for asset classification, in modification to the
provisions in this regard stipulated in para 12, will be available to the borrowers
engaged in important business activities, subject to compliance with certain
conditions as e numerated in para 20.2 below. Such treatment is not extended to the
following categories of advances:
i. Consumer and personal advances;
ii. Advances classified as Capital market exposures;
iii. Advances classified as commercial real estate exposures
The asset classification of these three categories accounts as well as that of other
accounts which do not comply with the conditions enumerated in para 20.2, will be
governed by the prudential norms in this regard described in para 17 above.

20.2 Elements of special regulatory framework.
The special regulatory treatment has the following two components:

(i) Incentive for quick implementation of the restructuring package.
(ii)Retention of the asset classification of the restructured account in the pre-
restructuring asset classification category.
20.2.1 Incentive for quick implementation of the restructuring package
As stated in para 17.1.2, during the pendency of the application for restructuring of
the advance with the bank, the usual asset classification norms would continue to
apply. The process of reclassification of an asset should not stop merely because
the application is under consideration. However, as an incentive for quick
implementation of the package, if the approved package is implemented by the
bank as per the following time schedule, the asset classification status may be
restored to the position which existed when the reference was made to the CDR
Cell in respect of cases covered under the CDR Mechanism or when the
restructuring application was received by the bank in non-CDR cases:
(i) Within 120 days from the date of approval under the CDR Mechanism.
(ii) Within 120 days from the date of receipt of application by the bank in cases
other than those restructured under the CDR Mechanism.
20.2.2 Asset classification benefits

Subject to the compliance with the undernoted conditions in addition to the
adherence to the prudential framework laid down in para 17:
(i) In modification to para 17.2.1, an existing 'standard asset' will not be
downgraded to the sub-standard category upon restructuring.
(ii) In modification to para 17.2.2, during the specified period, the asset
classification of the sub-standard / doubtful accounts will not deteriorate upon
restructuring, if satisfactory performance is demonstrated during the specified
period.
However, these benefits will be available subject to compliance with the following
conditions:
i) The dues to the bank are 'fully secured' as defined in Annex - 5. The condition of
being fully secured by tangible security will not be applicable in the following
cases:
(a) MSE borrowers, where the outstanding is up to Rs.25 lakh.
(b) Infrastructure projects, provided the cash flows generated from these
projects are adequate for repayment of the advance, the financing bank(s)
have in place an appropriate mechanism to escrow the cash flows, and also
have a clear and legal first claim on these cash flows.
ii) The unit becomes viable in 8 years, if it is engaged in infrastructure activities,
and in 5 years in the case of other units.
iii) The repayment period of the restructured advance including the moratorium, if
any, does not exceed 15 years in the case of infrastructure advances and 10
years in the case of other advances. The aforesaid ceiling of 10 years would
not be applicable for restructured home loans; in these cases the Board of
Directors of the banks should prescribe the maximum period for restructured
advance keeping in view the safety and soundness of the advances.
iv) Promoters' sacrifice and additional funds brought by them should be a
minimum of 20 per cent of banks’ sacrifice or 2 per cent of the restructured
debt, whichever is higher. This stipulation is the minimum and banks may
decide on a higher sacrifice by promoters depending on the riskiness of the
project and promoters’ ability to bring in higher sacrifice amount. Further, such
higher sacrifice may invariably be insisted upon in larger accounts, especially
CDR accounts. The promoters’ sacrifice should invariably be brought upfront
while extending the restructuring benefits to the borrowers. The term 'bank's
sacrifice' means the amount of ';erosion in the fair value of the advance'; or
“total sacrifice”, to be computed as per the methodology enumerated in para
17.4.2 (i) and (ii) above.

v) Promoter’s contribution need not necessarily be brought in cash and can be

brought in the form of de-rating of equity, conversion of unsecured loan
brought by the promoter into equity and interest free loans.
vi) The restructuring under consideration is not a 'repeated restructuring' as
defined in para (v) of Annex - 5.
20.2.3 In line with the recommendation of the Working Group (Chairman: Shri B.
Mahapatra) the extant incentive for quick implementation of restructuring package
and asset classification benefits (paragraph 20.2.1 & 20.2.2 of the master circular)
available on restructuring on fulfilling the conditions is withdrawn for all
restructurings effective from April 1, 2015 with the exception of provisions related to
changes in DCCO in respect of infrastructure as well as non-infrastructure project
loans (paragraph 4.2.15). It implies that with effect from April 1, 2015, a standard
account on restructuring (for reasons other than change in DCCO) would be
immediately classified as sub-standard on restructuring as also 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
the extant asset classification norms with reference to the pre-restructuring
repayment schedule.”
(Refer also to Annexure II and IV of Section A for information on accounts
restructured)
j. Scheme for Sustainable Structuring of, and Revisions, in the Schemes for Stressed
Assets:
Attention is drawn to the asset classification and provisioning requirements related to the
schemes of stressed assets; and Para 9 of RBI Circular DBR.No.BP.BC.103/21.04.132/2015-
16 dated June 13, 2016, dealing with the same. Sub Para A states that where there is a
change of promoter the asset classification and provisioning requirement will be as per the
‘SDR’ scheme or ‘outside SDR’ scheme as applicable.
Where there is no change of promoters, there is a revision as per sub Para B (in clauses
(iii) and (iv) as under (per RBI Circular DBR.No.BP.BC.33/21.04.132/2016-17 dated 10-11-
2016) as given hereunder:
RBI Circular DBR.No.BP.BC.103/21.04.132/2015-16 dated RBI Circular DBR.No.BP.BC.33/21.04.132/2016-17 dated
13-06- 2016 10-11-2016
iii. In respect of an account that is classified as non- (iii) In respect of an account that is classified as a
performing asset on the date of this resolution, the non-performing asset as on the reference date, the
entire outstanding (both Part A and part B) shall Part B instruments shall continue to be classified
continue to be classified and provided for as a non- as non-performing investment and provided for as
performing asset as per extant IRAC norms a non-performing asset as per extant prudential
norms, as long as such instruments remain in Part
i. . B. The sustainable portion (Part A) may optionally
be treated as ‘Standard’ upon implementation of
ii. the resolution plan by all banks, subject to
provisions made upfront by the lenders being at
least the higher of 50 percent of the amount held in
part B or 25 percent of the aggregate outstanding
(sum of Part A and part B). For this purpose, the
provisions already held in the account can be
reckoned.
iv. Lenders may upgrade Part A and Part B to iv) In all cases, lenders may upgrade Part B to
standard category after one year of satisfactory standard category and reverse the associated
performance of Part A loans. In case of any pre- enhanced provisions after one year of satisfactory
existing moratorium in the account, the upgrade will performance of Part A loans. In case of any pre-
be permitted one year after completion of the existing moratorium in the account, this upgrade
longest moratorium, subject to satisfactory will be permitted one year after completion of the
performance of Part A debt during this period. longest such moratorium, subject to satisfactory
However, lenders will continue to mark to market performance of Part A debt during this period.
Part B instruments as per the norms stated herein. However, in all cases, the required MTM provisions
on Part B instruments must be maintained at all
times. The transition benefit available in terms of
paragraph 9(B)(vi) can however be availed.
vi. If the provisions held by the bank in respect of an account prior to this resolution are more than the

cumulative provisioning requirement prescribed in the applicable sub-paragraphs above, the excess can
be reversed only after one year from the date of implementation of resolution plan (i.e. when it is reflected
in the books of the lender, hereinafter referred to as ‘date of restructuring’), subject to satisfactory
performance during this period.
Reference may also be made to the changes (vide RBI Circular

DBR.No.BP.BC.34/21.04.132/2016-17 dated November 10, 2016 ), in the guidelines carried out
in the regulatory measures relating to Schemes for Stressed Assets, to strengthen the lenders’
ability to deal with stressed assets (viz., Framework for Revitalising Distressed Assets, Flexible
Structuring of Project Loans, Strategic Debt Restructuring Scheme, Scheme for Sustainable
Structuring of Stressed Assets) , with the objectives of
o harmonisation of stand-still clause as applicable in case of Strategic Debt Restructuring
Scheme with other guidelines;
o clarifying on the deemed date of commencement of commercial operations; and
o partial modification of certain guidelines based on the experience gained in using these
tools in resolving the stressed assets as well as feedback received from stakeholders,
and taking into consideration the requirements of the construction sector.
As required by the said Circulars, the Banks are expected to make the disclosures in their financials as
given in Annexure A V - Section A for inclusion in the Notes to financial statements (Refer Section K.1)
5. Additional provisions as per RBI Prudential Norms:

Floating provisions and Provisions at higher rates for NPAs
(Refer Para 5.6 of Part A of the Master Circular)
Beyond specific provisions as per RBI Guidelines, the Bank may consider higher provisions as
under:
- Floating Provisions
pursuant to a Board approved policy (and subject to a level being indicated) for provisions (for
possible inherent weaknesses in accounts), to be termed as “Floating provisions”, which can be
utilised for contingencies only under extraordinary circumstances (to cover General/Market/
Credit risks); and utilization thereof for specific provisions in impaired accounts to be made with
the approval of the Board and prior permission of the RBI.
Such provisions can be netted off from the Gross NPAs for disclosure of net NPAs, or to
be treated as part of Tier II Capital within the overall ceiling of 1.25 % of the total risk-weighted
assets.
Para 5.6.4 requires the disclosure of the movement of floating provisions.
- Other provisions (not being Floating Provisions) – refer Clause 5.7 of the Circular - on
voluntary basis at rates which are higher than as per the prudential norms, which may be
consistently applied/adopted
6. Certain Specific requirements:

Provision for country risk in respect of the country where the Bank’s net funded exposure is one
percent or more of its total assets.
Provisioning* for country ECGC Provisioning@
risk, other than for loss Classification %
Assets - Risk category Requirement
Insignificant A1 0.25
Low A2 0.25
Moderate B1 5
High B2 20
Very high C1 25
Restricted C2 100
Off credit D 100
(*in addition to the {@lower level of provisioning (say 25% of
provisions required to be held the above), may be made in respect of short
according to the borrowers’ asset term exposures with contractual maturity of
classification status) less than 180 days}

7. Projects under implementation (Para 4.2.15 of part A of the Master Circular)

A provision equivalent of the Income already wrongly recognized in the past should be made in respect
of assets, which are in reality are other than ‘Standard’.
i) Funded interest should be fully provided for; and
ii) amounts converted into equity, debentures or other instruments should be fully
provided for and not reversed till realization/redemption.
iii) Where up-gradation is done in case of restructured accounts, the provision made earlier, net of the
sacrifice, can only be reversed based on the satisfactory performance during the period of one
year from the commencement of the first payment of interest or principal, whichever is later, on the
credit facility with longest period of moratorium under the terms of restructuring package.
8. Sale of financial assets:

Provision needs to be made to cover possible shortfall in the sale of financial assets (at prices below
the Net Book Value); and while actual shortfalls are to be charged off to the Profit & Loss Account, the
excess, if any, resulting on sale of some such assets is not to be reversed out of the provisions built up
for this purpose (Refer Para 5.9.9 of the Master Circular).
Liquidity facility drawn/outstanding for more than 90 days in respect of securitization transactions as
per guidelines of 1-2-2006 should be fully provided for-Para 5.9.11 of the Master Circular.
9. Provisioning Coverage Ratio (PCR)- more relevant to Head Office

PCR is essentially the ratio of provisioning to gross non-performing assets and indicates the
extent of funds a bank has kept aside to cover loan losses.
10. Export Finance

i) Post-shipment Supplier's Credit
Where ECGC cover is available for post shipment credit, and guarantee is invoked by the bank, under
the EXIM Bank guarantee-cum -refinance programme and the amount is received within 30 days from
EXIM Bank the advance is not NPA for asset classification/provisioning to the extent the amount is
received. (Refer Para 4.2.17 of the Master Circular).
ii) Export Project Finance
Where the bank is able to evidence the remittance made by the actual importer in a bank abroad, but
the bank abroad is unable to remit the amount due to political developments such as war, strife, UN
embargo, etc. the asset classification as NPA need not be made for a period of one year from the date
of the amount so deposited overseas. (Refer Para 4.2.18 of the Master Circular )
11. RECLASSIFICATION OF ADVANCES- Upgradation:

Generally accounts classified as doubtful or loss assets should not be upgraded other than by way of the
remedying of the default and recovery of dues, from the borrower’s own funds and not arising out of
fresh facilities sanctioned.
a. If the overdues (all amounts in default including those within 90 days prior to account becoming NPA,
i.e., interest suspense and interest unapplied in full) are recovered and if accounts fall under the
norms prescribed for Standard Asset then the asset can be reclassified as standard asset.
Logically, there can be no Interest Suspense/unapplied interest in accounts classified as
Standard/Non performing, other than in Central Govt. guaranteed accounts where guarantee is
not invoked/repudiated.
b. If the installments/interest are rescheduled for payment under nursing etc., the account should
show satisfactory performance for a continuous period of 1 year and then only it can be classified
as Standard Asset.
c. Basic verification procedures at the Branch maintaining a borrower’s account, based on
documents held at a Centralised Advances Processing Cell/ Centre
In case all or any of the loan procedures (whether in connection with grant or renewal of credit
facilities) are not conducted at the Branch, but are centralized at any Loan Processing Cell/Centre,
(e.g.,Retail Assets and Small & Medium Enterprises City Credit Centre, Retail Assets Credit Processing
Centre, Retail Credit Processing Centre, or by whatever name called), involving appraisal, sanction,
execution of documents, disbursements, collection and holding of post dated cheques etc., and the
documents are in the custody and control of the said centralized Cell/ office, the Auditor should seek
confirmation, as to preview, if any, by the Branch, of the compliance of the applicable RBI prudential
norms of asset classification, income recognition and provisioning, in so far as the advances at the
Branch are concerned.

The auditor should be satisfied as to the compliance of the appraisal systems, completeness and
accuracy of the original records/documents in the custody and control of the centralized office, pursuant
to which the Branch is maintaining the borrowal account; and in particular:
i. that confirmation is available from the said Office as to the number and amount of the advances
accounts, and whether these tally with the data in the Branch;
ii. that the Sanction Letters and modifications thereof, issued by the said centralized office and held
for compliance at the Branch, are duly authenticated (and not merely computer generated), and that
the centralised office has confirmed that subsequent instructions were issued strictly as per the
applicable documentation and sanction terms with all updated modifications/ changes therein held in
their custody; and that these are strictly in consonance with the applicable prudential regulatory
norms, based on the Guidelines/regulatory impositions in force.
iii. that the system generated data for the Branch advances is in line with all the regulatory built in
parameters, based on facts made available from the centralized office as regards matters other than
operation of the credit facilities and accounts recorded at the Branch.
iv. that the drawing power/limits have been properly computed at the centralized office, including in
consortium advances/multiple banking arrangements as conveyed to the Branch for ensuring that the
account of the borrower is monitored at the Branch accordingly, without any defaults; and due
diligence reports, wherever required, have been obtained.
v. that adverse features pointed out by the Internal/concurrent/inspection audit of the centralized office
as regards the appraisal, disbursement, sanction, documentation under their control, have been
considered and conveyed to the Branch for classification of the account; and further that there are no
adjustments known to the centralized office, which are pending on behalf of the Branch, including
unbanked post dated cheques or other similar instruments, held by the said office affecting the
borrowers’ accounts.
vi. that for the purpose of audit, the Branch will provide necessary evidence at the Branch, and access
to information, documents, security and guarantee aspects etc. to justify the classification of the
advances; and compliance of information sought by the Auditor, including on all large advances, in
the manner required.
The above information is critical to examination/reporting on advances.
d. Incremental/Accelerated Provisions in terms of Para No. 5.5.(vi) and Para No. 31 of the Master
Circular dated 1-7-2015
Attention is drawn to the sub-categorisation and status of advances in terms of Para No. 5.5.(vi) and
Para No. 31 of the master circular dated 1-7-2015 (Special mention accounts, Sub-Standard
Advances etc.) which call for incremental/accelerated provisions as stated in the said circular. The
Auditor needs to enquire and ensure that system driven information incorporates the requirements
of the sub-categorisation of Advances in the manner required to enable incremental/accelerated
provisions to be considered at Head Office. Since, the classification of Advances is tabulated based
on parameterisation in the system as determined at the Head Office level the same needs to be
ensured at that level, not warranting any further exercise to be done at Branch Level.
At the Branch level, income is to be recognized on standard assets, except as otherwise stated, on
the basis of contractual accrual; and on Non-performing assets (NPAs) only on realization
12. INCOME RECOGNITION

Broad Principle
Income needs to be recognised in keeping with the basic requirements of the Accounting
Standard - "AS- 9-Rvenue Recognition" issue by ICAI.
Income Recognition refers to accounting of interest income, commission and other
charges/income at the branch in respect of advances and for other services.
Income Recognition on advances is based on record of recovery and operations in the account.
The availability of security/credit guarantee cover, is not the criteria; and no income should
be accrued in NPAs , even if recovery is made subsequent to the year end.
a. Generally, income:
i . can be recognised and accrued on all performing accounts (generally classified as
Standard Accounts (except Central Govt. guaranteed advances in default, where
guarantee is not invoked)

ii. cannot be accrued or recognized on NPAs comprising “Sub-standard”, “Doubtful”, “Loss”

Assets unless the same is actually realized / recovered.
b. in respect of accounts identified during the year as NPA:
i. income already debited/applied to the borrower’s account, is derecognised, to the
extent not realized (including for past periods). Other income by way of charges ,
commission etc. to the extent not realized must also be reversed and derecognized.
ii. such derecognition is expected to be reversed to Income of the current period(and held
in Interest Suspense or similar account); and not be credited to/reversed in the
account of the borrower (as has become the practice in some banks).
iii. income contractually due after identification of the account as NPA (unless there are
recovery proceedings in litigation), is computed in the normal course but not applied to
the borrower’s account, but kept in a separate Memorandum record (i.e. Unapplied
interest).
iv. Law charges incurred for recovering the amount of advance should be charged off and
record maintained in the Memorandum books, to enable recovery in future.
v. If recoveries are made subsequently, unless there are clear instructions from the
borrower, these recoveries comprise income (first by realization of unrealized charges,
thereafter reduction to the extent of interest Suspense Account and thereafter by
application of unapplied interest)
vi. Where one of the accounts of the borrower is NPA and the others are regular and are
being serviced, while the borrower is NPA, realization in regular accounts can be
considered as income.
c. Amounts realized in NPAs can be appropriated to Income provided the credits are not out of
fresh/additional credit facilities sanctioned to the borrower.
d. in the case restructured accounts where the pre-restructuring facilities were classified as 'sub-
standard' and 'doubtful', interest income on the additional finance is to be recognised only on
realization; and during the moratorium , if any granted for payment of interest, income cannot
be recognized/accrued.
e. In case of NPAs comprising Advances against gold ornaments, Govt. and all other kinds of
securities , as well as those against the Bank’s Term Deposit Receipts, Kisan Vikas Patras,
IVPs, National Savings Schemes and Life Policies (which are not exempted from
provisioning requirements), income may also be recognized on realization.
f. recoveries in excess of total acquisition cost of NPAs purchased from other banks, can
only be appropriated as income.
g. Appropriation of recoveries in NPAs:
Subject to any instructions to the contrary from the constituent, the Bank, according to the
Prudential norms, has a right to appropriate the recoveries to either income (earlier not
recognized), or to principal; provided the Bank adopts a proper accounting policy and does it on
a uniform and consistent basis (Refer Para 3.3.2 of the Master Circular dated 1-7-2015).
However, keeping in view AS 9 Revenue Recognition issued by the ICAI, it would be
appropriate to reckon revenue in priority to principal by giving priority to charges and
interest .
In case the Bank adopts a policy to accord priority to principal, the account can never be
upgraded till full recovery of interest (applied/unapplied), is made.
In nutshell in the absence of any specific instructions of /clear agreement with the
constituent, the order of appropriation of recoveries, should appropriately be
- unrealized charges,
- interest suspense,
- unapplied interest,
- the principal in default, and thereafter
- the principal, unless there are also stipulations as regards right of recompense
(which would require recovery and recognition), prior to appropriation towards the
principal.

h. Income in respect of rehabilitation package approved by BIFR/term lending institutions.

As per Para 4.2.19 of Part A of the Master Circular, it has been clarified that the existing credit
facilities sanctioned to a unit under rehabilitation package approved by BIFR/term lending
institutions, will continue to be classified as sub standard or doubtful as the case may be; while in
respect of additional facilities sanctioned under the rehabilitation packages, the Income
Recognition, Asset Classification norms will become applicable after a period of one year
from the date of disbursement. This implies that, income cannot be accrued in respect of the
fresh facilities, unless the income is realized.
i. Interest Suspense and Unapplied Income in NPAs:

The amount derecognized as income and retained in Interest Suspense or similar account, does not
comprise a provision, but is netted off from the gross advance of the borrower for disclosure of the
advance net of such amount in the Balance Sheet.
It is imperative that the figures of Interest Suspense/Unapplied Interest are computed and kept
updated. This also has a nexus to the entries relating to recoveries being correctly recorded for
NPAs upon realization, for making claims; and in cases of waiver in terms of ‘One time
settlements’, the sanction of the competent authority to waive the amount.
Any deletion/ downward revision in the accretions recorded in such registers must be examined with
justification thereof to avoid potential loss of income.
Interest contractually due but not realized/recovered is a loss/potential loss of income to the
bank. A watch needs to be kept on the propensities in the aggregate figures on a periodic
basis. Comparison and analysis of the aggregate of year-end “Interest Suspense” and
“Unapplied Interest” with that of the previous year-end , with reference to the composition of
the advances based on their health status, would reveal any divergent trends between the
status of classification and income, and should be considered as a good audit tool.
Recoveries that cannot be appropriated (due to any conditions attached thereto e.g. amounts
received but not capable of appropriation as per Court Orders.), need to be retained in the books
of the Branch as a Liability.
j. Upgradation of health status of accounts

NPAs can be upgraded and become performing when the monetary /non monetary defaults that
caused the NPA status, are remedied, by recoveries that are due and compliances that are
imperative. Income can be accrued on such upgraded accounts that are considered performing.
13. RESOLUTION OF STRESSED ASSETS – REVISED FRAMEWORK VIDE RBI CIRCULAR NO.
DBR.NO.BP.BC.101/21.04.048/2017-18 DATED FEBRUARY 12, 2018:
INTRODUCTION:
In view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), the RBI has revised
the existing guidelines covering resolution of stressed assets. Withdrawal of extant instructions
(with effect from 12.2.2018)
Framework for revitalising distressed assets.
1. Corporate debt restructuring scheme (CDR).
2. Flexible structuring of existing long term project loans.
3. Strategic debt restructuring scheme (SDR).
4. Change in ownership outside SDR.
5. Scheme for sustainable structuring of stressed assets (S4A).
The Revised Framework is as per the following:

 EARLY IDENTIFICATION AND REPORTING OF STRESS:
Lenders are required to identify “incipient stress” immediately on “default” (involving non
honouring of fund and non fund based exposures and debt obligations in whole or in part when
due) resulting in SMA 0,1,2. Monthly Reporting of credit information and classification for all
SMAs of Rs. 50 Crores and above, effective 23.2.2018, is required to be made to Central
Repository of Information on Large Credits (CRILC) on monthly basis. If in default weekly
reporting is to be made.

 IMPLEMENTATION OF RESOLUTION PLAN:

This involves Board approved Policies that require prompt remedial action to cure the default in
any manner including restructuring.
 IMPLEMENTATION CONDITIONS FOR RESOLUTION PLAN (RP):

Implementation is deemed as complete only when the two conditions are met in that the
borrower is not in default; and in case of restructuring when documentation and security is
complete and all terms/conditions/capital structure get reflected in books of lender and borrower.
In case of restructuring, change in ownership in exposure of Rs. 100 crores or above,
independent credit evaluation from RBI approved Credit Rating Agency is required expect where
exposure is over Rs. 500 crores requiring such agencies and implementation can proceed only if
the rating is RP4 or above as stipulated.
 TIMELINES FOR LARGE ACCOUNTS TO BE REFERRED UNDER IBC:

- In respect of accounts with aggregate exposure of the lenders at Rs. 2,000 crores and
above, on or after March 1, 2018, including accounts where resolution may have been
initiated under any of the existing schemes as well as accounts classified as restructured
standard assets which are currently in respective specified periods (as per the previous
guidelines), RP shall be implemented as per the following timelines:
(i) If in default as on the reference date, then 180 days from the reference date.
(ii) If in default after the reference date, then 180 days from the date of first such default.
- If a RP in respect of such large accounts is not implemented as per the timelines specified in
above Para, lenders shall file insolvency application, singly or jointly, under IBC within 15
days from the expiry of the said timeline.
- For other accounts with aggregate exposure of the lenders below Rs. 2,000 crores and, at or
above Rs.100 crores, the Reserve Bank intends to announce, over a two-year period,
reference dates for implementing the RP to ensure calibrated, time-bound resolution of all
such accounts in default.
 PRUDENTIAL NORMS:
The revised prudential norms applicable to any restructuring, whether under the IBC framework
or outside the IBC, are as under:
- “ Asset Classification:
In case of restructuring, the accounts classified as 'standard' shall be immediately
downgraded as non-performing assets (NPAs), i.e., ‘sub-standard’ to begin with. The non-
performing assets, upon restructuring, would continue to have the same asset classification
as prior to restructuring. In both cases, the asset classification shall continue to be governed
by the ageing criteria as per extant asset classification norms.
- Conditions for Upgrade basically involve curing all defaults and satisfactory performance
throughout.
- Provisioning Norms (restructured accounts):

These are as per the then applicable norms (Prior to/post 1.7.2015)
- Additional Finance:
Any additional finance approved under the RP (including any resolution plan approved by
the Adjudicating Authority under IBC) may be treated as 'standard asset' during the specified
period under the approved RP, provided the account performs satisfactorily during the
specified period. If the restructured asset fails to perform satisfactorily during the specified
period or does not qualify for upgradation at the end of the specified period, the additional
finance shall be placed in the same asset classification category as the restructured debt.

- Income recognition norms:

Interest income is to be accrued in respect of restructured accounts classified as 'standard
assets' and in ‘ non-performing assets’ on actual recovery.
In the case of additional finance in accounts where the pre-restructuring facilities were
classified as NPA, the interest income is on recovery except when the restructuring is
accompanied by a change in ownership.
- Conversion of principal into debt / equity and unpaid interest into 'funded interest
term loan' (FITL), debt or equity instruments:
The FITL / debt / equity instruments created by conversion of part of principal / unpaid
interest, as the case may be, will be placed in the same asset classification category in
which the restructured advance has been classified.
These instruments shall be valued as per usual valuation norms and marked to market.
Equity instruments, whether classified as standard or NPA, shall be valued at market value,
if quoted, or else at break-up value (without considering the revaluation reserve, if any) as
ascertained from the company's balance sheet as on March 31st of the immediate preceding
financial year. In case balance sheet as on March 31st of the immediate preceding financial
year is not available, the entire portfolio of equity shares of the company held by the bank
shall be valued at Re.1. Depreciation on these instruments shall not be offset against the
appreciation in any other securities held under the AFS category.
The unrealised income represented by FITL / Debt or equity instrument can only be
recognised in the profit and loss account as under:
a. FITL/debt instruments: only on sale or redemption, as the case may be;
b. Unquoted equity/ quoted equity (where classified as NPA): only on sale;
c. Quoted equity (where classified as standard): market value of the equity as on the date of
upgradation, not exceeding the amount of unrealised income converted to such equity.
Subsequent changes to value of the equity will be dealt as per the extant prudential
norms on investment portfolio of banks.
- Change in ownership
In case of change in ownership of the borrowing entities, credit facilities of the concerned
borrowing entities may be continued/upgraded as ‘standard’ after the change in ownership is
implemented, either under the IBC or under this framework. If the change in ownership is
implemented under this framework, then the classification as ‘standard, shall be subject to
the following conditions:
i. Banks shall conduct necessary due diligence in this regard and clearly establish that the
acquirer is not a person disqualified in terms of Section 29A of the Insolvency and
Bankruptcy Code, 2016.
ii. The new promoter shall have acquired at least 26 per cent of the paid up equity capital of
the borrower entity and shall be the single largest shareholder of the borrower entity.
iii.The new promoter shall be in ‘control’ of the borrower entity as per the definition of
‘control’ in the Companies Act 2013 / regulations issued by the Securities and Exchange
Board of India/any other applicable regulations / accounting standards as the case may
be.
iv.The conditions for implementation of RP as per Section I-C of the covering circular are
complied with.
For such accounts to continue to be classified as standard, all the outstanding loans/credit
facilities of the borrowing entity need to demonstrate satisfactory performance (as defined)
during the specified period. If the account fails to perform satisfactorily at any point of time
during the specified period, the credit facilities shall be immediately downgraded as non-
performing assets (NPAs) i.e., ‘sub-standard’. Any future upgrade for such accounts shall be
contingent on implementation of a fresh RP (either under IBC, wherever mandatory filings
are applicable or initiated voluntarily by the lenders, or outside IBC) and demonstration of
satisfactory performance thereafter.

Further, the quantum of provisions held by the bank against the said account as on the date
of change in ownership of the borrowing entities can be reversed only after satisfactory
performance during the specified period.”
The provisioning in respect of exposure to borrower entities against which insolvency

applications are filed under the IBC shall be as per their asset classification in terms of the
Master Circular on Prudential norms on Income Recognition, Asset Classification and
Provisioning.
 SUPERVISORY REVIEW:
Any failure on the part of lenders in meeting the prescribed timelines or any actions by lenders
with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will
be subjected to stringent supervisory / enforcement actions as deemed appropriate by the
Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary
penalties
 DISCLOSURES:
Banks shall make appropriate disclosures in their financial statements, under ‘Notes on
Accounts’, relating to resolution plans implemented (based on guidelines to be issued
separately).
 EXCEPTIONS:
Restructuring in respect of projects under implementation involving deferment of date of
commencement of commercial operations (DCCO), shall continue to be covered under the
guidelines contained at paragraph 4.2.15 of the Master Circular
No.DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015 on ‘Prudential norms on Income
Recognition, Asset Classification and Provisioning pertaining to Advances’.
14. SUMMARY
Advances, except where special conditions apply to restructuring, Central Govt. Guaranteed
accounts etc., are generally required to be judged on their performance parameters, based on
documentation, operations, security and guarantee cover and the amounts outstanding and due
under various facilities; and based on examination of the credit facilities availed, the borrowers are
to be classified as at the year-end, keeping in view the applicable prudential norms of the RBI, into:
a) Performing (generally categorized as STANDARD); and
b) Non-performing (categorized as SUB STANDARD, DOUBTFUL or LOSS),
Once examined and so classified at the Branch level, there is a mechanical application of the
percentage of provisioning (generally at a centralized level), as stipulated by RBI; and these are
benchmark provisions which are the minimum; and can be accelerated based on judgment of the
auditor and to his satisfaction.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
REFERENCE MAY ALSO BE MADE TO THE RECKONER FOR CATEGORISATION (E II) and THE
CHART (E III)

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BANK AUDIT 2017-18
Reference may be drawn from Part C of the RBI Master Circular No. DBR.No.BP .BC . 2/21.04.048/2015-16
dated 1.7.2015 as regards Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP)
As per Para 25 of the RBI Master Circular dated 1-7-2015, Guidelines on Joint Lenders’ Forum (JLF) and
Corrective Action Plan (CAP), will be applicable for lending under Consortium and Multiple Banking
Arrangements (MBA) [except instructions in paragraphs 26.1, 31.1, 32 & 33, which will be applicable in all cases of
lending], and should be read with the prudential norms on ‘Restructuring of Advances by banks’ as contained in
Part B of the Master Circular and any other instruction issued in this regard from time to time.
Formation of Joint Lenders’ Forum(not mandatory in cases of offshore borrowers which do not have any
presence in India, either by way of a subsidiary, parent or a group entity)
As per para 26.1 of the Master Circular on prudential norms, before a loan account turns into a NPA, banks are
required to identify incipient stress in the account by creating three sub-categories under the Special Mention
Account (SMA) category as given in the table below:
Illustrative list of signs of stress for
SMA Sub- Basis for JLF Agreement
categorising an account as SMA-0 - as per
categories classification
Appendix to Part C
1. Delay of 90 days or more in (a) submission

SMA-0 Principal or interest All the lenders must sign a
of stock statement / other stipulated operating
payment not JLF agreement incorporating
control statements or (b) credit monitoring or
overdue for more the broad rules for the
financial statements or (c) non-renewal of
than 30 days but functioning of the JLF
facilities based on audited financials.
account showing recommended by IBA through
2. Actual sales / operating profits falling short
signs of incipient Master JLF agreement to
of projections accepted for loan sanction by
stress (Please see explore the possibility of the
40% or more; or a single event of non-
Appendix to Part C) borrower setting right the
cooperation / prevention from conduct of stock
irregularities/weaknesses in
audits by banks; or reduction of Drawing
the account. The JLF may
Power (DP) by 20% or more after a stock
invite representatives of the
audit; or evidence of diversion of funds for
Central/ State Government/
unapproved purpose; or drop in internal risk
Project authorities/Local
rating by 2 or more notches in a single review.
authorities, if they have a role
3. Return of 3 or more cheques (or electronic
in the implementation of the
debit instructions) issued by borrowers in 30
project financed.
days on grounds of non-availability of
balance/DP in the account or return of 3 or
more bills / cheques discounted or sent under
collection by the borrower.
4. Devolvement of Deferred Payment
Guarantee (DPG) instalments or Letters of
Credit (LCs) or invocation of Bank Guarantees
(BGs) and its non-payment within 30 days.
5. Third request for extension of time either for
creation or perfection of securities as against
time specified in original sanction terms or for
compliance with any other terms and
conditions of sanction.
6. Increase in frequency of overdrafts in
current accounts.
7. The borrower reporting stress in the
business and financials.
8. Promoter(s) pledging/selling their shares in
the borrower company due to financial stress.
Lenders also have the option of forming a JLF
even when the aggregate exposure (AE) in an
account is less than Rs.1000 million and/or
when the account is reported as SMA-0
While it is optional in other cases, at the
specific request of lender/s, with
substantiated grounds, for formation of a
JLF on account of imminent stress (and to
be reported to CRILC as SMA-0)
Bnkaud.18 Sanjay v &mmk 28

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BANK AUDIT 2017-18
SMA-1 Principal or interest Applicability of the Framework in

payment overdue Certain Cases: Banks must report their
between 31-60 days Cash Credit (CC) and Overdraft (OD)
accounts, including overdraft arising out
of devolved LCs/invoked guarantees to
CRILC as SMA 2 if:
 the outstanding balance remains

continuously in excess of the
sanctioned limit/drawing power for 60
days; and/or
 in cases where the outstanding balance

in the principal operating account is
less than the sanctioned limit/drawing
power, but there are no credits
continuously for 60 days or credits are
not enough to cover the interest
debited during the same period,
 bills purchased or discounted (other

than those backed by LCs issued by
banks) and derivative exposures with
receivables representing positive mark
to market value, remain overdue for
more than 60 days and banks should
continue to report the credit information
and SMA status to CRILC on loans
including loans extended by their
overseas branches.
Banks should mandatorily form a

committee to be called Joint Lenders’
Forum (JLF) if the aggregate exposure
(AE) [fund based and non-fund based
taken together] of lenders in that account
is Rs 1000 million and above.
Lenders also have the option of forming a

JLF even when the AE in an account is
less than Rs.1000 million
Convener of JLF
 Consortium Leader in Arrangement for

consortium accounts
 Lender with the highest aggregate

exposure (AE) will convene JLF under
Multiple Banking Arrangements
(MBA)
SMA-2 Principal or interest

payment overdue
between 61-90 days
RBI has set up a Central Repository of Information on Large Credits (CRILC) to collect, store, and
disseminate credit data to lenders requiring banks report credit information, including classification of an account
as SMA to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs.50
million and above(other than crop loans and their inter bank exposures, including to NABARD, SIDBI, EXIM Bank
and NHB ); further requiring, that whenever a large borrower's account becomes overdue for 61 days that account
is required to be reported to CRILC as SMA-2. Banks will be permitted to report their SMA-2 accounts and JLF
formations on a weekly basis at the close of business on every Friday.[Refer RBI circulars DBS.No.OSMOS.9862
and 14703/33.01.018/2013-14 , respectively dated 13-2-2014 and 22-5-2014]
Failure to report SMA status of accounts to CRILC or resorting to conceal the actual status of or evergreen the
accounts , will have consequences of accelerated provisioning for such accounts.

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BANK AUDIT 2017-18
To arrive at an early and feasible solution to resolve stress and to preserve the economic value of the underlying
assets JLF would explore various options for a Corrective Action Plan (CAP), that would include Rectification,
Restructuring and Recovery.
(a) Rectification, involves (b) Restructuring
Obtaining from the borrowers, their  if it is prima facie viable and the borrower is not a wilful defaulter (unless,
commitment to regularize the in exceptional cases, borrower is permitted to and is in a position to
account , based on identifiable cash rectify the wilful default, and subject to the approval of the board/s of
flows within targeted period individual bank/s) ;
(without detriment to the lenders) to
prevent slippage to NPA category.  viability by the JLF to be on acceptable viability benchmarks (Debt
Equity Ratio, Debt Service Coverage Ratio, Liquidity/Current Ratio) and
In the absence of such a possibility, those as per CDR mechanism.
JLF may , in consultation with the
borrower, explore the option of  the bank secure itself with guarantees and title to properties/assets of the
further equity/strategic investors; borrower and commitment for non alienation of the assets without the
and may consider providing permission of the JLF
need based additional finance
without attempting to ever-greening any deviation from such commitment affecting security/ recoverability, has
the account consequences of initiating recovery proceedings
. JLF may sign an Inter Creditor Agreement (ICA) require the borrower to
sign the Debtor Creditor Agreement (DCA) to provide the legal basis for any
restructuring process.
(The decisions agreed upon by a minimum of 75% of creditors by value and

60% of creditors by number in the JLF would be considered as the basis for
proceeding with the restructuring of the account, and will be binding on all
lenders under the terms of the ICA)
Prudential guidelines on restructuring of advances as per Part B of the

Master Circular shall apply and asset classification of the account as on the
date of formation of JLF will be taken into account.
Only Standard, sub standard classification accounts shall be considered ;

and doubtful in exceptional cases (in cases where a small portion of debt is
doubtful i.e. the account is doubtful in less than 10% of creditors (by value)
Unless referred to the CDR Cell ,JLF should conduct a detailed Techno-
Economic Viability (TEV) study, and if found viable, finalise the restructuring
package within 30 days from the date of signing off the final CAP.
General principle of restructuring - that the shareholders bear the first loss
rather than the debt holders
JLF/CDR to consider the following options when a loan is restructured:
 Possibility of transferring equity of the company by promoters to the
lenders to compensate for their sacrifices;
 Promoters infusing more equity into their companies;
 Transfer of the promoters’ holdings to a security trustee or an escrow
arrangement till turnaround of company. This will enable a change in
management control, should lenders favour it.
Restructuring package to be conveyed to the borrower for
implementation within the 15 days next following:
 package (less than Rs.5000 million)approval by JLF
 package ( Rs.5000 million and above) approval by JLF based on the
results of evaluation to be obtained within 45 days of referral to an
Independent Evaluation Committee of experts
Restructuring Referred by the JLF to the CDR Cell
CDR Cell should directly prepare the Techno-Economic Viability (TEV)
study and restructuring plan in consultation with JLF within 30 days from
the date of reference to it by the JLF

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BANK AUDIT 2017-18
AE of less than Rs.5000 million, package should be submitted to CDR
Empowered Group (EG) for approval and decision within 90 days,
(extendable to 180 days from the date of reference to CDR Cell). Referrals
to CDR Cell by JLF will have to be finally decided by the CDR EG within the
next 30 days. If approved by CDR EG, the restructuring package should be
approved by all lenders and conveyed to the borrower within the next 30
days for implementation.
AE of Rs.5000 million and above, the TEV study and restructuring
package prepared by CDR Cell to be subjected to an evaluation by an
Independent Evaluation Committee (IEC) of experts, who will view viability
aspects to ensure terms of restructuring being fair to the lenders and give
their recommendation to the CDR Cell and to JLF within 45 days. If JLF
proceeds with the restructuring, it should communicate to CDR Cell which
should submit the package to CDR EG within 7 days from receiving the
views of IEC. Thereafter, CDR EG should decide on the
approval/modification/ rejection within the next 30 days. If approved by
CDR EG, the restructuring package should be approved by all lenders and
conveyed to the borrower within the next 30 days for implementation.
Other Issues/Conditions Relating to Restructuring by JLF/CDR Cell
 stipulate the timeline to achieve viability milestones to be periodically
reviewed
 sale of non-core assets or other assets may be stipulated as a condition
for restructuring the account, if under the TEV study the account is likely
to become viable on hiving-off of non-core activities and other assets.
in respect of listed companies, lenders may be ab-initio compensated for
their loss/sacrifice (diminution in fair value of account in net present value
terms) by way of issuance of equities of the company upfront, with no right
of recompense clause; otherwise, the right of recompense clause be
incorporated to the extent of shortfall. For unlisted companies, the JLF will
have option of either getting equities issued or incorporate suitable ‘right to
recompense’ clause.
JLF/CDR could consider action on differential security interest
available to secured lenders, partially secured lenders and unsecured
lenders
( c) Recovery process may be resorted to where the options of rectification and restructuring are in vain
Time limits for JLF:
JLF must arrive at an agreement on the option to be adopted for CAP within 45 days from
(i) the date of an account being reported as SMA-2 by one or more lender, or
(ii) receipt of request from the borrower to form a JLF, if it senses imminent stress.
JLF must sign off the detailed final CAP within the next 30 days from the date of arriving at such an agreement.
JLF may decide on a mutually agreed option that facilitates the implementation of restructuring
package.
As regards prudential norms and operational details, RBI’s guidelines on CDR Mechanism, including
OTS, will be applicable to the extent that they are not inconsistent with these guidelines. In terms of
paragraph 6.3 (iii) of Part A of the Master Circular, a financial asset may be sold to the SC / RC by any
bank / FI where the asset is reported as SMA-2 by the bank / FI to Central Repository for Information
on Large Credit (CRILC). If restructuring has been decided as the CAP then banks will not be
permitted to sell such assets to SCs/RCs, without arranging their share of additional finance to be
provided by a new or existing creditor.
Accelerated Provisioning in respect of non performing accounts are as under:
a.cases where banks fail to report SMA status of the accounts to CRILC or resort to methods
with the intent to conceal the actual status of the accounts or evergreen the account, banks will
be subjected to accelerated provisioning for these accounts ; and current provisioning
requirement and the revised
b. if lenders fail to convene the JLF or fail to agree upon a common CAP within the stipulated
time frame,
c. cases where lender agreeing to, and being signatory to the restructuring decision under CAP by JLF,
changes its stance later or delays/denies implementation shall , in respect of its lending

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BANK AUDIT 2017-18
Revised accelerated provisioning
Asset Classification Period as NPA Current provisioning (%)
(%)
Sub- standard Up to 6 months 15 No change
(secured) 6 months to 1 year 15 25
Sub-standard Up to 6 months 25 (other than infrastructure
25
(unsecured ab-initio) loans)
20 (infrastructure loans)
6 months to 1 year 25 (other than infrastructure
loans) 40
20 (infrastructure loans)
Doubtful I 2nd year 25 (secured portion) 40 (secured portion)
100 (unsecured portion) 100 (unsecured portion)
Doubtful II 3rd & 4th year 100 for both secured and unsecured
40 (secured portion)
portions
100 (unsecured portion)
Doubtful III 5th year onwards 100 100
If an account is reported by any of the lenders to CRILC as SMA 2 and the JLF is not immediately
formed or CAP is not decided within the prescribed time limit , then the accelerated provisioning will be
applicable only on the bank having responsibility to convene JLF and not on all the lenders in
consortium/multiple banking arrangement. In other cases, accelerated provisioning will be applicable
on all banks in the consortium/multiple banking arrangement.
In case the lead bank of the consortium/bank with the largest AE under the multiple banking
arrangement fails to convene JLF within 15 days of reporting SMA-2 status, the bank with second
largest AE shall convene the JLF within the next 15 days, and have the same responsibilities and
disincentives as applicable to the lead bank/bank with largest AE.
if an account is reported by any of the lenders to CRILC as SMA 2 and the JLF is not immediately
formed or CAP is not decided within the prescribed time limit due to above reasons, then the
accelerated provisioning will be applicable only on the bank having responsibility to convene JLF and
not on all the lenders in consortium/multiple banking arrangement. In other cases, accelerated
provisioning will be applicable on all banks in the consortium/multiple banking arrangement. Banks are
also advised that in case the lead bank of the consortium/bank with the largest AE under the multiple
banking arrangement fails to convene JLF within 15 days of reporting SMA-2 status, the bank with
second largest AE shall convene the JLF within the next 15 days, and have the same responsibilities
and disincentives as applicable to the lead bank/bank with largest AE.
30. Prudential Norms on Asset Classification and Provisioning
30.1 While a restructuring proposal is under consideration by the JLF/CDR, the usual asset
classification norm would continue to apply. The process of re-classification of an asset should not stop
merely because restructuring proposal is under consideration by the JLF/CDR.
30.2 However, as an incentive for quick implementation of a restructuring package, the special asset
classification benefit on restructuring of accounts as per extant instructions would be available for
accounts undertaken for restructuring under these guidelines, subject to adherence to the overall
timeframe for approval of restructuring package detailed in paragraphs 28.3 and 28.4 above and
implementation of the approved package within 90 days from the date of approval. Therefore, if the
JLF/CDR takes a shorter time for an activity towards restructuring and implementation of the approved
package as against the prescribed limit, then it can have the discretion to utilise the saved time for
other activities provided the aggregate time limit is not breached. The asset classification status as on
the date of formation of JLF would be the relevant date to decide the asset classification status of the
account after implementation of the final restructuring package. As mentioned in paragraph 20.2.3 in
Part – B of this Master Circular, the special asset classification benefit as above have been
withdrawn for all restructurings with effect from April 1, 2015 with the exception of provisions
related to changes in Date of Commencement of Commercial Operations (DCCO) in respect of
infrastructure and non-infrastructure project loans.
30.3 As a measure to ensure adherence to the proposals made in these guidelines as also to impose
disincentives on borrowers for not maintaining credit discipline, accelerated provisioning norms (as
detailed in paragraph 32 below) are being introduced.

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BANK AUDIT 2017-18
31. Accelerated Provisioning
31.1 In cases where banks fail to report SMA status of the accounts to CRILC or resort to
methods with the intent to conceal the actual status of the accounts or evergreen the account,
banks will be subjected to accelerated provisioning for these accounts and/or other supervisory
actions as deemed appropriate by RBI. The current provisioning requirement and the revised
accelerated provisioning in respect of such non performing accounts are as under:
31.2 Further, any of the lenders who have agreed to the restructuring decision under the CAP by JLF
and is a signatory to the ICA and DCA, but changes their stance later on, or delays/refuses to
implement the package, will also be subjected to accelerated provisioning requirement as indicated at
para 31.1 above, on their exposure to this borrower i.e., if it is classified as an NPA. If the account is
standard in those lenders’ books, the provisioning requirement would be 5%. Further, any such
backtracking by a lender might attract negative supervisory view during Supervisory Review and
Evaluation Process.
31.3 Presently, asset classification is based on record of recovery at individual banks and provisioning
is based on asset classification status at the level of each bank. However, if lenders fail to convene the
JLF or fail to agree upon a common CAP within the stipulated time frame, the account will be subjected
to accelerated provisioning as indicated at para 31.1 above, if it is classified as an NPA. If the account
is standard in those lenders’ books, the provisioning requirement would be 5%. In this connection,
banks have represented to us that in many cases JLF is not formed due to lead bank of the
consortium/bank with the largest AE under the multiple banking arrangements, not convening the JLF
and not taking initiatives in the matter. It is emphasized that success of the Framework depends not
only on early reporting but also on taking corrective action in time by the JLF. Thus, any delay in
formation of JLF will defeat the objectives of the Framework. Accordingly, if an account is reported by
any of the lenders to CRILC as SMA 2 and the JLF is not immediately formed or CAP is not decided
within the prescribed time limit due to above reasons, then the accelerated provisioning will be
applicable only on the bank having responsibility to convene JLF and not on all the lenders in
consortium/multiple banking arrangement. In other cases, accelerated provisioning will be applicable
on all banks in the consortium/multiple banking arrangement. Banks are also advised that in case the
lead bank of the consortium/bank with the largest AE under the multiple banking arrangement fails to
convene JLF within 15 days of reporting SMA-2 status, the bank with second largest AE shall convene
the JLF within the next 15 days, and have the same responsibilities and disincentives as applicable to
the lead bank/bank with largest AE.
31.4 If an escrow maintaining bank under JLF/CDR mechanism does not appropriate proceeds of
repayment by the borrower among the lenders as per agreed terms resulting into down gradation of
asset classification of the account in books of other lenders, the account with the escrow maintaining
bank will attract the asset classification which is lowest among the lending member banks, and will also
be subjected to corresponding accelerated provision instead of normal provision. Further, such
accelerated provision will be applicable for a period of one year from the effective date of provisioning
or till rectification of the error, whichever is later.
32. Wilful Defaulters and Non-Cooperative Borrowers
32.1 In addition to instructions on Wilful Defaulters as contained in RBI Master Circular

DBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2014 (updated upto January 7, 2015)and with a
view to ensuring better corporate governance structure in companies and ensuring accountability of
independent/professional directors, promoters, auditors, etc. henceforth, the following prudential
measures will be applicable:
(a) provisioning in respect of existing loans/exposures of banks to companies having director/s (other
than nominee directors of government/financial institutions brought on board at the time of distress),
whose name/s appear more than once in the list of wilful defaulters, will be 5% for standard accounts;
and if NPA - accelerated provisioning as above. This is a prudential measure since the expected
losses on exposures to such borrowers are likely to be higher.
(b) defaulters who are unreasonable and non-cooperative with lenders may be classified and
reported to CRILC. Detailed instructions in this regard have been issued vide circular
DBR.No.CID.BC.54/20.16.064/2014-15 dated December 22, 2014 on Non-Cooperative Borrowers.
Further, If any particular entity reported as non-cooperative, any fresh exposure to such a borrower
will by implication entails higher provisioning.. However, for the purpose of asset classification and
income recognition, the new loans would be treated as standard assets. This is a prudential measure
since the expected losses on exposures to such non-cooperative borrowers are likely to be higher.

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BANK AUDIT 2017-18
33. Dissemination of Information
33.1 At present, the list of Suit filed accounts of Wilful Defaulters (Rs.2.5 million and above) is
submitted by banks to the Credit Information Companies (CICs) of which they are member(s), who
display the same on their respective websites as and when received. The list of non-suit filed accounts
of Wilful Defaulters (Rs.2.5 million and above) is confidential and is disseminated by RBI among banks
and FIs only for their own use. In order to make the current system of banks/FIs reporting names of
suit filed accounts and non-suit filed accounts of Wilful Defaulters and its availability to the banks by
CICs/RBI as current as possible, banks are advised to forward data on wilful defaulters to the
CICs/Reserve Bank at the earliest but not later than a month from the reporting date and they must
use/ furnish the detailed information as per the format prescribed in our Master Circular
DBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2014 (updated upto January 7, 2015) on ‘Wilful
Defaulters’.
33.2 In terms of our Master Circular on Wilful Defaulters mentioned above, in case any falsification of
accounts on the part of the borrowers is observed by the banks / FIs, and if it is observed that the
auditors were negligent or deficient in conducting the audit, banks should lodge a formal complaint
against the auditors of the borrowers with the Institute of Chartered Accountants of India (ICAI) to
enable the ICAI to examine and fix accountability of the auditors. RBI reiterates these instructions for
strict compliance. Pending disciplinary action by ICAI, the complaints may also be forwarded to the RBI
(Department of Banking Supervision, Central Office) and IBA for records. IBA would circulate the
names of the CA firms against whom many complaints have been received amongst all banks who
should consider this aspect before assigning any work to them. RBI would also share such information
with other financial sector regulators/Ministry of Corporate Affairs (MCA)/Comptroller and Auditor
General (CAG).
33.3 Further, banks may seek explanation from advocates who wrongly certify as to clear legal titles in
respect of assets or valuers who overstate the security value, by negligence or connivance, and if no
reply/satisfactory clarification is received from them within one month, they may report their names to
IBA. The IBA may circulate the names of such advocates/valuers among its members for consideration
before availing of their services in future. The IBA would create a central registry for this purpose.
34. These guidelines have become effective from April 1, 2014.
Attention is also drawn to Para No. 32 regarding Wilful Defaulters and Non-Cooperative
Borrowers and Para No. 33 regarding Dissemination of Information of the Master
Circular dated 1-7-2015
C-2: Framework for Revitalising Distressed Assets in the Economy - Refinancing of Project
Loans, Sale of NPA and Other Regulatory Measures
35. Paragraphs 3, 4 and 5 of the our circular DBOD.BP.BC.No.98/21.04.132/2013-14 dated February

26, 2014 on ‘Framework for Revitalising Distressed Assets in the Economy - Refinancing of Project
Loans, Sale of NPA and Other Regulatory Measures’ contain instructions on sale of financial assets by
banks and use of countercyclical/floating provisions. These instructions have been consolidated in
paragraphs 6 and 7 under Part A of this Master Circular. Guidelines on the subject of ‘Refinancing of
Project Loans’ has been included at paragraph 12 of this Master Circular. Other regulatory measures
are as under:

RECKONER FOR CATEGORISATION OF ADVANCES INTO STANDARD/SUBSTANDARD/DOUBTFUL/LOSS ASSETS AS AT 31.3.2018 E II
PERFORMING NON PERFORMING (defined by RBI Refer Para 2 of the Master Circular dated 1.7.2015)
STANDARD ASSET(Not defined by RBI) SUB-STANDARD (NPA for upto12 months) DOUBTFUL ASSET * LOSS ASSET *
- It is not NPA with no arrears of amounts Accounts, where the current net worth of All existing accounts in sub standard A Loss Asset is one where
due or in default, and will include: the borrower/guarantor or the current category for more than 12 months and new the outstanding is
- finance for industrial projects/agriculture market value of the security is not accounts transferred to this category, and considered uncollectable/
within the moratorium period of interest. sufficient to ensure full recovery; and those which, due to inherent weaknesses unrealisable or where the
- unremitted export proceeds received but accounts identified as having well defined can be straight away classified as doubtful salvage value of security is
held up abroad for a period of one year, weaknesses that jeopardize the Where, in the pre-restructuring stage, the negligible (say less than
where there are restrictions by the foreign liquidation of the advance, and status of the borrower migrates in the 10% of the outstanding
country to repatriate. characterized by the distinct possibility of normal course to Doubtful, including with advance).
- additional Credit facilities for a period of one some loss, unless deficiencies are efflux of time or other defaults, in cases
year in certain restructured accounts corrected. where disposal of application/ proposal for Refer also Para 4.2.9(i)(b)
- additional credit facilities pursuant to These include: restructuring is pending disposal as regards the erosion in
rehabilitation/nursing program/package -all existing accounts under this category the value of the security
finalized for BIFR cases and sick SSI (now for a total duration of less than or equal Refer Para 4.2.9(i)(a) as regards the erosion realizable, if less than 10%
SME units), in consortium with other banks to 12 months since their identification, in the value of the security realizable as of the outstanding in the
- fully secured principal where the instalments and fresh accounts identified during the would determine the status of the asset as a account as would
or interest are rescheduled before, as well year. doubtful asset i.e., where there is significant determine the status of the
as after commencement of commercial -advances, otherwise satisfactory, but are erosion in the value of the security asset as a loss asset; as
production but before the asset is classified NPA due to non monetary defaults (irrespective of the advance), and the same also in cases of frauds by
as sub-standard (the element of sacrifice where the regular/ adhoc credit limits is less than 50% of the value as assessed or borrowers, causing serious
having been written off/provided) facilities are not reviewed/renewed for accepted by the Bank or by RBI as per the impairment to the asset.
- - upgraded restructured/ rescheduled 180 days from the due date/date of ad latest inspection, the same would be a
advances with record of satisfactory hoc sanction; or where stock statements doubtful asset. These assets, unless
performance after the specified period after are not received for 90 days after the written off, need to be
from the commencement of the first account became irregular (i.e. where [Note: Date of identification of Advance as provided for @ 100%.
payment of interest or principal, whichever is advances are continued based on stock NPA is also very relevant, and cannot be Unless reversal of its
later, on the credit facility with longest period statements that are older than 3 months changed so that the period of retention classification status takes
of moratorium under the terms of from the due date) thereof as doubtful asset, is correctly place, a borrower is to be
restructuring package. - where in the pre-restructuring stage the considered. In records maintained under classified as Loss asset
- Standard asset taken over in Take-out borrower is either sub standard or due EDP environment, the field of the date of with efflux of time , where
Finance arrangements. to any defaults, becomes NPA pending NPA is frozen] the advance is retained in
- amount received under the guarantee-cum- disposal of application/ proposal for the doubtful classification
refinance programme of EXIM Bank to restructuring; or in the post restructuring for over 36 months
exporters in default. outside the prescribed time limits, the
- no non monetary defaults including reviews/ status is not restored
renewals of limits and receipt of stock
statements on time.
- Central Govt. guaranteed accounts, where
guarantee is not invoked/ repudiated

I TERM LOANS I TERM LOANS I TERM LOANS I TERM LOANS

- Performing advances where the interest/
installments of principal due and including a) Where the account has gone into If the borrower has remained in the sub- Where the asset is
up to 30-12- 2017 have been recovered. default and is overdue as regards: standard category for a period exceeding 12 considered as a loss asset
- NPAs purchased from another bank, for - principal (installments) for over 90 months, unless due to erosion in the value of by virtue of any other
the initial period of 90 days; and such days during the year and the default the security, the asset is a loss asset. facility being a loss
status to be continued only if there are is not cured up to 31-3-2018; and /or category.
recoveries with reference to the cash flows - servicing of interest for the period of NPAs purchased from another bank, if not
estimated at the time of purchase 90 days after it became due from with satisfactory performance will be NPA, if
- rescheduled term loans and fresh short term the end of any quarter doubtful in the selling bank’s books
agricultural loans in areas notified as b) Loans restructured when these were
affected by natural calamities, as a relief in sub standard category; except
measure, if within the revised period and additional advance for a period of one
without default thereafter. year
c) NPAs purchased from another bank, if
not with satisfactory performance will
be NPA, if sub standard in the selling
bank’s books
II.CASH CREDIT/OVERDRAFT II.CASH CREDIT/OVERDRAFT II.CASH CREDIT/OVERDRAFT II.CASH

III.LOANS REPAYABLE ON DEMAND III.LOANS REPAYABLE ON DEMAND III.LOANS REPAYABLE ON DEMAND CREDIT/OVERDRAFT
Where the account is out of order for over III.LOANS REPAYABLE
- The outstanding balance does not remain 90 days i.e. If the asset has remained in the sub-standard ON DEMAND
continuously in excess of the sanctioned a) In case where the outstanding category for a period exceeding 12 months.
limit/Drawing Power for a period of more continuously exceeds limit/DP; or Where the outstanding is
than 90 days; and the credits in the account b) Where the outstanding is less than considered uncollectable/
are enough to cover the interest debits limit/ drawing power , but unrealisable or where the
during the same period. i) if there are no credits value of security is
continuously for more than 90 negligible (say less than
- Credit card account minimum amount due, days as at 31.3.2018(since 30- 10% of the outstanding
as mentioned in the statement, if paid fully 12-2017) advance).
within 90 days from the next statement or
date. ii) if the credits from 30-12-2017 are Refer Para 4.2.9(i)(b) as
not adequate to cover interest regards the erosion in the
- The borrower has not been declared by RBI debited for the same period. value of the security
as NPA realizable (including in
cases of frauds) as would
determine the status of the
asset as a loss asset.

IV.BILLS PURCHASED/DISCOUNTED IV.BILLS PURCHASED AND IV.BILLS PURCHASED/DISCOUNTED IV.BILLS

If the bill is not overdue DISCOUNTED If the asset has remained in Sub- PURCHASED/DISCOUN
Or If the bill has remained overdue for standard Category for a period TED
If the bill is overdue after 30-12-2017. a period of more than 90 days i.e. exceeding 12 months. Where the outstanding is
overdue prior to 30-12-2017. considered
Where bills discounted under LC uncollectable/
are not accepted on presentation unrealisable or where
and amount remains in default the value of security is
negligible (say less than
10% of the outstanding
advance).
Notes:
1. Classification status of the borrower is to be in the most adverse category in any of the funded credit facilities, except in cases of restructuring, otherwise permitted.
2 * Classification of advance to “Doubtful” or “Loss” category may get accelerated in time where there is serious impairment, and erosion in the value of realisable
security is significant, i.e., to Doubtful category, if erosion is more than 50%, based on valuation as assessed by bank/valuers/RBI {Refer RBI Master Circular dated
1-7-2015 – Paras 4.2.9 (i)(a) and “Loss” category, if erosion is more than 90% and the realizable value is less than 10% of the borrowing – Para 4.2.9 (i)(b)}.
3 As per guidelines (Refer Para 4.2.9.(ii) of the Master Circular dated 1-7-2015), for provision in respect of all fraud cases, the entire amount due to the bank (irrespective
of the quantum of security held against such assets), or for which the bank is liable (including in case of deposit accounts), is to be provided for over a period not
exceeding four quarters commencing with the quarter in which the fraud has been detected – Para 4.2.9(ii)(a) and where there has been delay, beyond the prescribed
period, in reporting the fraud to the Reserve Bank, the entire provisioning is required to be made at once – Para 4.2.9(ii)(b).
4 As per guidelines (Refer Para 6 of Part A of the Master Circular dated 1-7-2015), purchase/sale of Assets in NPA classification can be made (individually or as a pool
of accounts) for upfront sale consideration in cash , if such assets have remained in that(NPA) classification for at least two years in the books of the selling bank; and
there is a laid down Board Policy for the transaction being (without recourse and not on the basis of a contingent price or subsequent liability devolving on the selling
bank). Such assets cannot be sold back to the same bank and must be held by the buying bank for at least 15 months.
5. Care needs to be taken in accounts subject to restructuring in each classification, to accurately determine the amounts requiring provision, sacrifice and retention of
FITL provision, if carved out of interest in default.
6. Relief for MSME Borrowers registered under Goods and Services Tax (GST):
As per RBI Circular No. DBR.No.BP.BC.100/21.04.048/2017-18 dated 7.2.2018, relief has been provided for MSME Borrowers registered under GST as on 31.1.2018 where,
notwithstanding the default in servicing, the account, is to be treated as “Standard”, subject to satisfaction of certain conditions.

AUDIT OF BANK BRANCH ACCOUNTS FOR 2017-18 E III
General minimum provisioning and income recognition requirements as per RBI IRAC norms
Nature/classification of advance Provision required on Gross Income recognition

advances -% / basis
I. Standard (refer para 5.5 of the Master
Circular DBR.No.BP.BC.2/21.04.048/2015-16
dated 1.7.2015)
A. Other than restructured
i. agricultural and Direct advances 0.25 Accrue
to Agricultural and SME sectors
SME Sector {as defined in Master
Circular FIDD.MSME &
NFS.BC.No.07/06.02.31/2015-16 dated
1.7.2015 on Lending to Micro, Small &
Medium Enterprises (MSME)
Sector}.
ii.Commercial Real Estate (CRE) 1.00 Accrue
Sector
iii.Commercial Real Estate – 0.75 Accrue
Residential Housing Sector (CRE -
RH) Sector
iv.Teaser Loans (refer Para 5.9.13 of 2.00 (the standard asset Accrue
the Master Circular dated 1.7.2015) provisioning on the outstanding
amount of such loans has been
increased from 0.40% to 2.00% in
view of the higher risk associated
with them. The provisioning on these
assets would revert to 0.40 % after 1
year from the date on which the
rates are reset at higher rates if the
accounts remain ‘standard’).
v.all other advances 0.40 Accrue
This will include Medium Enterprises
{ refer definition of the terms Micro
Enterprises, Small Enterprises, and
Medium Enterprises as per Master
Direction FIDD.MSME &
NFS.12/06.02.31/2017-18 dated July
24, 2017 on Lending to Micro, Small
& Medium Enterprises (MSME)
Sector}
vi.Advances against term deposits, 0.40 Accrue
NSCs eligible for surrender, IVPs,
KVPs and life policies – Para 4.2.11
Where adequate margin is available in the
accounts – treat as Standard and not NPA.
vii. Export Project Finance
(Refer Para 4.2.18 of Part A of the 0.40 Accrue
Master Circular)
Where the importer has paid the dues to
the bank abroad before it became NPA in
the books of the bank, but in turn it is
unable to remit the amount due to
political developments etc. and where the
lending bank is able to evidence the
same, the classification can be
standard for a period of one year from
the date the amount was deposited
by the importer in the bank abroad.
(Also Refer Note No. 7 given below)

viii. Central Govt. guaranteed accounts 0.40 (where the Guarantee is not Accrue, if not NPA
(Para 4.2.14 of the Master Circular dated invoked or repudiated)
1.7.2015)
ix. MSME Borrowers Registered under GST 5.00 per cent a) Accrue, if not NPA
(Refer RBI Circular No.
DBR.No.BP.BC.100/21.04.048/2017-18 b) Interest on accounts in
dated 7.2.2018 default payment of
interest on accounts
treated as Standard as
per circular dated
8.2.2018, is to be
considered on
realization.
B. a) Restructured advances (Refer Para Accrue
17.4.1 of Master Circular dated 1.7.2015)
Normal Provision
(Also Refer Note No. 5 given below) 5.00 per cent
b) Restructured NPAs Upgraded to Accrue
standard (one year from the date of
upgradation) (Refer Para 17.4.1 of
Master Circular dated 1.7.2015)
Normal Provision 5.00 per cent
c) Restructured Accounts, special
regulatory treatment for Asset
Classification (Refer Para 20 of Master
 Where earlier eligible to be retained or
upgraded to Standard due to the
available incentives for quick
implementation (refer to provisions
related to changes in DCCO in respect
of infrastructure as well as non-
infrastructure project loans (para 5.00 per cent Accrue
4.2.15 of Master Circular).
Normal provision
 Where ineligible or downgraded, On realization
provision as applicable to the
classification to which the account
belongs
d) FITL, usually comprising interest in
default funded on restructuring
If Standard – Normal Provision 5.00 per cent Accrue
If NPA, even if upgraded 100.00 per cent On realization
C. Guidelines for Provisions under Special
Circumstances (Refer Para 5.9 of the
a) BIFR accounts (Refer Clause 5.9.1.(ii)
of Master Circular dated 1.7.2015) Accrue on such additional
Fresh disbursement for a period of 1 Nil facility
year from the date of disbursement
b) SSI units (Refer Clause 5.9.1.(iii) of

Additional credit facilities granted to Accrue on such additional
sick units and where rehabilitation Nil facility
packages / nursing programmes have
been drawn by the banks
themselves or under consortium
arrangements, for a period of 1 year
By implication these additional facilities are
Standard.

D. Wilful Defaulters and Non-Cooperative 5.00 per cent Accrue

Borrowers (refer Para 32.1 of the Master
(Also refer Note no. 14 given below)
II. a) Sub Standard (refer Para 5.4 of the Provision on the gross amount of On realization
Master Circular dated 1.7.2015 advance without considering benefit
of any security/guarantee:
 Secured portion:
On the total outstanding book balance
without considering benefit of any 15%
security/guarantee.
 Unsecured portion excluding 25%
infrastructure projects
 Unsecured portion for infrastructure 20%
projects in respect of infrastructure
lending / infrastructure loan accounts
where the banks have in place an
appropriate mechanism to escrow the
cash flows and also have a clear and
legal first claim on these cash flows.
Realisable value of Security (tangible or Also see example at Note No.10

treated as tangible) in relation to given below
‘Exposure’ (both funded and non-
funded) is to be considered for the
purpose of provisioning.
Annuities under build-operate-transfer
(BOT) model in respect of road / highway
projects and toll collection rights, are
treated as tangible securities, where there
are provisions to compensate the project
sponsor if a certain level of traffic is not
achieved, subject to the condition that banks’
right to receive annuities and toll collection
rights is legally enforceable and irrevocable.
In case of PPP projects, the debts due to the
lenders are to be considered as secured to
the extent assured by the project authority in
terms of the Concession Agreement, subject
to the following conditions :
i) User charges / toll / tariff payments are
kept in an escrow account where senior
lenders have priority over withdrawals by the
concessionaire;
ii) There is sufficient risk mitigation, such as
pre-determined increase in user charges or
increase in concession period, in case
project revenues are lower than anticipated;
iii) The lenders have a right of substitution in
case of concessionaire default;
iv) The lenders have a right to trigger
termination in case of default in debt service;
and
v) Upon termination, the Project Authority
has an obligation of (i) compulsory buy-out
and (ii) repayment of debt due in a pre-
determined manner.

b) Sub Standard (Accelerated Provisioning i) Secured: Provision (%) On realization

applicable for lending under Consortium Up to 6 months 15
and Multiple Banking Arrangements 6 months to 1 year 25
refer Para 25, Para 31 and Para 32 of the ii) Unsecured ab-initio
Master Circular dated 1.7.2015) - Other than infrastructure loans
(Also Refer Note No. 14 given below) Up to 6 months 25
6 months to 1 year 40
- Infrastructure loans
Up to 6 months 25
6 months to 1 year 40
III.a) Doubtful assets a. Unsecured portion On realization
(will include advances where erosion in 100 % of the extent to which the
the realizable value of security is advance is not covered by the
significant, being less than 50 per cent of realistically estimated realizable
the value assessed by the bank or value of the security to which the
accepted by RBI at the time of last bank has a valid recourse
inspection) – Para 4.2.9(i)(a) b. Secured portion
Period for which Provision(%)
the advance has
remained in the
‘doubtful’ category
 Upto 1 year 25
 1 to 3 years 40
 More than 3 years 100
b) Doubtful assets (Accelerated a. Unsecured portion On realization
Provisioning applicable for lending 100 % of the extent to which the
under Consortium and Multiple Banking advance is not covered by the
Arrangements refer Para 25, Para 31 realistically estimated realizable
and Para 32 of the Master Circular value of the security to which the
dated 1.7.2015) (Also Refer Note No. 14 bank has a valid recourse
given below) b. Secured portion
Period for which Provision(%)
the advance has
remained in the
‘doubtful’ category
 Upto 1 year 40
 2 to 3 years 100
 More than 4 year 100
IV. Loss assets 100% On realization

(will include advances where the realizable
value of the security, as assessed by the
bank/ approved valuers / RBI is less than
10 % of the outstanding in the borrowal
accounts) – Para 4.2.9(i)(b)
V. Provisioning* for country risk,  Accrue if Standard
other than for loss assets @Provisioning Requirement  On realization, if NPA
Risk category ECGC Classification (%)
Insignificant A1 0.25
Low A2 0.25
Moderate B1 5
High B2 20
Very high C1 25
Restricted C2 100
Off credit D 100
(*in addition to the provisions required to be {@lower level of provisioning (say 25%
held according to the borrowers’ asset of the above), may be made in respect
classification status) of short term exposures with
Provision shall not exceed 100% of the contractual maturity of less than 180
outstanding. days}Para 5.9.8 of the Master Circular

VI. Advances against term deposits,

NSCs eligible for surrender, IVPs,
KVPs and life policies – Para 4.2.11
Where adequate margin is not available in the
accounts - to be classified in the relevant sub As per applicable percentage On realization
category of NPA
VII. Central Govt. guaranteed 0.40 No income to be
accounts being NPA (Para 4.2.14 of of accrued
the Master Circular dated 1.7.2015)
Since the date of the identification of
borrower as NPA, interest accrued
contractually not realized will be
recorded as Interest Suspense/
Memorandum Accounts
VIII. Incremental provision for unhedged Likely Loss / Incremental  Accrue if Standard
foreign currency exposure (Refer para EBID (%) Provisioning  On actual realization, if
5.5.(vi) of the master circular) Requirement on NPA
the total credit
exposures over
and above
extant standard
asset
provisioning
Upto 15 per cent 0
More than 15 per 20bps
cent and upto 30
per cent
cent and upto 50
per cent
cent and upto 75
per cent
More than 75 per 80 bps
cent
IX. Projects under implementation

(Refer Para 4.2.15 of Part A of the Master
Circular)
i. to be treated as NPA Provision to be made based On realization in cash
 if failure to service the account (90 days on sub classification as NPA
norm) before date of commencement of
commercial operations (DCCO)
 Even If the account is serviced and
where commercial production has not
commenced
a. within two years from the original date of
commencement of operations– for
infrastructure projects*
b. within one year from the original date of
commencement of operations– for non-
infrastructure projects (including
Commercial Real Estate Exposures)

ii. can be retained as standard Until two years from the original DCCO Though Standard, income
- if account continues to be serviced 0.40% presumably to be accounted 0.40%
as per the restructured terms and on realization in cash and not
accrued in cases of
- fresh DCCO is fixed within the
restructured accounts for the
extended period If DCCO is extended
specified period.
a. for infrastructure projects Normal Provision:
 upto another two years beyond the 5.00 per cent – From the date of such
existing extended period of 2 years, i.e. restructuring till the revised DCCO or 2 Income
extension of 4 years in case arising out of years from the date of restructuring, In cases of moratorium for
court litigation/ arbitration proceedings; whichever is later. payment of interest, no
and income is to be booked on
Additional Provision:
 upto another one year beyond the accrual basis beyond two
existing extended period of 2 years, i.e. 5.00 per cent years/one year from the
extension of 3 years in other cases original DCCO in restructured
accounts for infrastructure
and other accounts
respectively.
NOTE:
Account is treated as
Standard and no income is
to be accrued
b. for non infrastructure projects Until one year from the original
 If the revised DCCO is within one year DCCO 0.40% 0.40%
from the original DCCO prescribed at
the time of financial closure If DCCO is extended
 If the DCCO is extended beyond one a) Normal Provision:
year and upto two years from the 5.00 per cent – From the date of such
original DCCO prescribed at the time of restructuring till the revised DCCO or 2
financial closure years from the date of restructuring,
whichever is later.
b) Additional Provision:
5.00 per cent
X. Frauds (Refer para 4.2.9.(ii) of the 100% Accrue

master circular)
Amounts at debit in Advances
comprising frauds identified including
where there has been delay, beyond the
prescribed period, in reporting the fraud to
the Reserve Bank, the entire provisioning
is required to be made at once.
Notes :
1. As at 31.3.2018 most of the banks would have no credit guarantee cover of DICGC.
2 An account once classified as NPA in Sub-Standard category, unless the status is reversed, or the
same becomes doubtful or ‘loss’, shall remain in that category for 12 months.
Classification of advance may get accelerated and migrate to “doubtful” or “loss” classification without
reference to the normal time-lag stipulated, where there is serious impairment or significant erosion in
the value of realisable security, as assessed by the bank/ valuers /RBI; and the borrower may get
categorized as “Doubtful” or loss if such erosion exceeds 50% or 90% or due to fraud.
(refer Section A- Paras 4.2.9(i) and (ii) respectively of the Master Circular dated 1.7.2015)
3 On examination of the individual advances accounts, the Borrower, other than in restructured
accounts, needs to be given the status as per the most adverse category determined in any credit
facility, including where there is crystallization/invocation/devolvement of the off balance sheet
exposures. All accounts of sole proprietors shall have the same categorization.

4 Restructuring / reschedulement / renegotiation must be on the basis of viability and cannot be

done retrospectively; and would require serious review, if done frequently.
5 Accounts where proposals received from borrowers involve a possible sacrifice in restructured accounts
and OTS, notwithstanding that these proposals have yet to be considered/implemented, would require
provision on grounds of prudence, as prima facie the borrowers have sought concessions due to their
inability to service the debt on the terms and conditions stipulated. Such provision, unless a higher
sacrifice is involved should be on the basis of other similar proposals which have been considered and
finalized.
6. Post-shipment Supplier’s Credit:

To the extent the payment received under Exim Bank guarantee-cum-refinance programme, the
advance may not be treated as a NPA- Refer Para 4.2.17 of the master circular dated 1-7-2015.
7. Export Project Finance:

To the extent not realized as a receipt from the overseas Banks into which moneys have been
deposited but cannot be remitted due to exceptional circumstances as per Para 4.2.18 of the master
circular dated 1.7.2015.
8. Provisions in respect of borrowings classified as ‘Standard’ are not to be netted off by banks from
Advances but to be treated as a ‘Reserve’ in Schedule 5 – Other Liabilities & Provisions
9. Valuation of Security for provisioning purposes

The existence and realizable value of the security (primary and collateral), charged to the bank is of
utmost importance as provisions are generally reckoned based on a realistic view being taken in
respect thereof. While, in “Schedule 9 – Advances” in the Balance Sheet of banks the advances
Secured by tangible assets are required to be disclosed, RBI has treated certain intangibles as
tangible for provisioning and disclosure purposes; e.g., advances against book debts, annuities under
build-operate-transfer (BOT) model in respect of road / highway projects and toll collection rights,
subject to the condition that banks’ right to receive annuities and toll collection rights is legally
enforceable and irrevocable; and for the purpose of restructuring proposals certain intangibles like
bank guarantees, Govt. Guarantees are treated on par with tangible securities.
Guidelines approved by the Board of Directors need to be in place with regard to valuation of
security in cases of NPAs with outstandings of Rs. 5 crore and above, requiring mandatory
stock audit at annual intervals by external agencies and collaterals such as immovable
properties charged in favour of the bank being got valued once in three
years by valuers appointed for the purpose.
Stocks charged as security shall comprise paid for stocks, i.e., after deducting therefrom the
value of the unpaid for stocks.
10. Substandard Classification

It may be noted that provision will have to be made @15% of the outstanding amount without
considering guarantee/security; and in respect of the unsecured exposures, an additional 10%
i.e.,@25% of the unsecured funded and non funded exposures in the cases of borrowers
identified as Sub Standard. In case of infrastructure borrowing covered by para 5.4 of the
Master Circular, the 25% is to be reduced to 20% provision.

The following illustration would help in understanding the methodology to be adopted for Sub Standard
Accounts:
EXPOSURES SECURITY ASSESSED (Tangible)

Nature Amount I II III IV V VI
(Rs.) #
FUNDED 100 130 100 40 20 10 8
UNFUNDED 200 20 20 20 20 20 20
------- ------- ------ -------- -------- -------- --------
TOTAL (Rs.) 300 150 120 60 40 30 28
===
@
Unsecured Exposures 150 180 240 260 270 272
-----------
-------- ------ -------- -------- --------
Total Exposure 300 300 300 300 300 300
==== === ==== ==== ==== ====
Provision computation
(based on % of funded
15% of funded outstanding 15 15 15 15 15
25% of unsecured exposure 37.50 45 - 65 67.50
20% of unsecured exposure - - 48 - -
-------- ------ ------- ------- --------
@
Total provision required 52.50 60 63 80 82.50 100
======
==== === ==== ==== ====
Notes:
a. I, II, III, IV, V and VI represent individual borrowers
b. # Borrower III is an infrastructure borrowing covered by the special concession in Para 5.4 of the Master
circular, eligible for a lower provision.
c. @ It may be noted that the assessed security is less than 10% of the total exposure, the criteria adopted
to treat the asset as a Loss Asset as per Para 4.2.9(i)(b) of Part A of the Prudential Norms. This
necessitates 100% provision of the funded amount.
11. Unsecured exposures

As per Clause 5.4 of Part A of the RBI Master Circular No. DBR.No.BP.BC.2/21.04.048/2015-16 dated 1.7.2015
which deals with provisions for NPAs ‘Security’ will mean tangible security properly discharged to the bank and
will not include intangible securities like guarantees (including State government guarantees), comfort letters etc.”
However, as per Annexure 5 (iii) of the said Circular, dealing with what is ‘Fully Secured’, the following assumes
importance:
For the purpose of restructuring, when the amounts due to a bank (present value of principal and interest
receivable as per restructured loan terms) are fully covered by the value of security, duly charged in its favour in
respect of those dues, the bank's dues are considered to be fully secured. While assessing the realisable value
of security, primary as well as collateral tangible securities would be reckoned. For this purpose the bank
guarantees, State Government Guarantees and Central Government Guarantees will be treated on par with
tangible security.
This can mean that post restructuring, where the advance is NPA, for the purpose of classification of the
advance, provision may have to be made for the above portion as unsecured and not covered by tangible
security; and to be disclosed in the balance sheet as such.
The amounts comprising the intangibles as per the Master Circular, will have to be culled out of the secured
exposures and quantified to be reflected as unsecured advances, while preparing the balance sheet.
More importantly, in case of NPAs, the unsecured portion as defined, would attract a higher provision, when
segregated from the secured portion.

12. Additional Provisions for NPAs at higher than prescribed rates

As made clear in Para 5.7 of Part A of the RBI Master Circular No. DBR.No.BP.BC.2/21.04.048/2015-16 dated
1.7.2015 the prescribed regulatory norms for provisioning represent the minimum/bench marked requirement. A
bank may voluntarily make provisions at rates which are higher than the rates so prescribed to reckon the
estimated anticipated loss, provided such higher rates are approved by the Board of Directors and
consistently adopted from year to year. The additional provisions so made, are not to be considered
as floating provisions. The provisions made for NPAs are to be netted off from gross NPAs for disclosure in the
balance sheet.
13. Provisions are generally centralized, based on classification made at branches; and at HO these are segregated
for Standard Assets and shown as part of Other Liabilities and Provisions in Schedule 5 of the Balance Sheet,
while for NPAs the assets are netted off.. This principle has been disregarded by RBI in respect of Provisions for
Diminution of Fair Value of assets in restructured accounts as per Para 5.9.10 of the Master Circular. The para
reads:
Provisions for diminution of fair value of restructured advances, both in respect of Standard Assets* as
well as NPAs, made on account of reduction in rate of interest and / or reschedulement of principal
amount are permitted to be netted from the relative asset.
14. Attention is drawn on the following paragraphs of the master circular dated 1-7-2015 relating to
incremental/accelerated provisions:
- In cases where banks fail to report SMA status of the accounts to CRILC or resort to methods with the intent
to conceal the actual status of the accounts or evergreen the account.
- Any lender having agreed to the restructuring decision under the CAP by JLF and being a signatory to the
ICA and DCA, but changing its stance or delays/refuses to implement the package in respect of its exposure
this borrower i.e., if it is classified as an NPA. If standard, the provisioning requirement would be 5%.
- If lenders fail to convene the JLF or fail to agree upon a common CAP within the stipulated time frame and if
it is classified as an NPA. If the account is standard in those lenders’ books, the provisioning requirement
would be 5%. In case JLF is not formed due to lead bank of the consortium/bank with the largest AE under
the multiple banking arrangements, not convening the JLF and not taking initiatives in the matter would be
subject to the accelerated provision. if an account is reported by any of the lenders to CRILC as SMA 2 and
the JLF is not immediately formed or CAP is not decided within the prescribed time limit due to above
reasons, then the accelerated provisioning will be applicable only on the bank having responsibility to
convene JLF and not on all the lenders in consortium/multiple banking arrangement. In other cases,
accelerated provisioning will be applicable on all banks in the consortium/multiple banking arrangement.
Banks are also advised that in case the lead bank of the consortium/bank with the largest AE under the
multiple banking arrangement fails to convene JLF within 15 days of reporting SMA-2 status, the bank with
second largest AE shall convene the JLF within the next 15 days, and have the same responsibilities and
disincentives as applicable to the lead bank/bank with largest AE.
- If an escrow maintaining bank under JLF/CDR mechanism does not appropriate proceeds of repayment by
the borrower among the lenders as per agreed terms resulting into down gradation of asset classification of
the account in books of other lenders, the account with the escrow maintaining bank will attract the asset
classification which is lowest among the lending member banks, and will also be subjected to corresponding
accelerated provision instead of normal provision. Further, such accelerated provision will be applicable for a
period of one year from the effective date of provisioning or till rectification of the error, whichever is later.
- Wilful Defaulters and Non-Cooperative Borrowers

The provisioning in respect of existing loans/exposures of banks to companies having director/s (other than
nominee directors of government/financial institutions brought on board at the time of distress), whose
name/s appear more than once in the list of wilful defaulters, will be 5% in cases of standard accounts; if
such account is classified as NPA, it will attract accelerated provisioning.
15. Resolution of Stressed assets – Revised Framework

Attention may be drawn from Para 13 of E (Page Nos. 24 to 27) above

AUDIT OF BANK BRANCH ACCOUNTS FOR 2017-18 E IV
OTHER CLARIFICATIONS ON ADVANCES:
1. PRIORITY SECTOR LENDING
(Refer RBI Master Circular FIDD.CO.Plan.BC.4/04.09.01/2015-16 dated 1-7-2015, RBI Master
Directions FIDD.CO.Plan.1/04.09.01/2016-17 dated 7-7-2016 and also RBI Master Directions
FIDD.MSME & NFS.12/06.02.31/2017-18 dated 24-7-2017)
1. Agricultural advances -, indicating target finance
In respect of direct advances granted for agricultural purposes listed in Section I of the Master
Circular on lending to priority sector (FIDD.CO.Plan.BC.4/04.09.01/2015-16 dated 1-7-2015; also
appearing as Annexure 2 to the Master Circular on Prudential norms
DBR.No.BP.BC.2/21.04.048/2015-16 dated 1-7-2015). as under :
The lending to agriculture sector has been defined to include (i) Farm Credit (which will include
short-term crop loans and medium/long-term credit to farmers) (ii) Agriculture Infrastructure and (iii)
Ancillary Activities. A list of eligible activities under the three sub-categories is indicated below:
1. 1 FARM CREDIT
A Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups
(JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data of
such loans], directly engaged in Agriculture and Allied Activities,viz., dairy, fishery, animal
husbandry, poultry, bee-keeping and sericulture. This will include
i) Crop loans to farmers, which will include traditional/non-traditional plantations and
horticulture, and, loans for allied activities
ii) Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchase
of agricultural implements and machinery, loans for irrigation and other developmental
activities undertaken in the farm, and developmental loans for allied activities.)
iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting,
sorting, grading and transporting of their own farm produce.
iv) Loans to farmers up to Rs. 50 lakh against pledge/hypothecation of agricultural produce
(including warehouse receipts) for a period not exceeding 12 months.
v) Loans to distressed farmers indebted to non-institutional lenders.
vi) Loans to farmers under the Kisan Credit Card Scheme.
vii) Loans to small and marginal farmers for purchase of land for agricultural purposes.
B Loans to corporate farmers, farmers' producer organizations/companies of individual
farmers, partnership firms and co-operatives of farmers directly engaged in Agriculture and
Allied Activities,viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture
up to an aggregate limit of Rs. 2 crore per borrower. This will include:
i) Crop loans to farmers which will include traditional/non-traditional plantations and
horticulture, and, loans for allied activities.
ii) Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchase
of agricultural implements and machinery, loans for irrigation and other developmental
activities undertaken in the farm, and developmental loans for allied activities.)
iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting,
sorting, grading and transporting of their own farm produce.
iv) Loans up to Rs. 50 lakh against pledge/hypothecation of agricultural produce (including
warehouse receipts) for a period not exceeding 12 months.
1.2 AGRICULTURE INFRASTRUCTURE
i) Loans for construction of storage facilities (warehouses, market yards, godowns and silos)
including cold storage units/ cold storage chains designed to store agriculture
produce/products, irrespective of their location.
ii) Soil conservation and watershed development.
iii) Plant tissue culture and agri-biotechnology, seed production, production of bio-pesticides,
bio-fertilizer, and vermi composting.
For the above loans, an aggregate sanctioned limit of Rs. 100 crore per borrower from the
banking system, will apply.
1.3 ANCILLARY ACTIVITIES
i) Loans up to Rs 5 crore to co-operative societies of farmers for disposing of the produce of
members.
ii) Loans for setting up of Agriclinics and Agribusiness Centres.
iii) Loans for Food and Agro-processing up to an aggregate sanctioned limit of Rs. 100 crore
per borrower from the banking system.
iv) Loans to Custom Service Units managed by individuals, institutions or organizations who
maintain a fleet of tractors, bulldozers, well-boring equipment, threshers, combines, etc.,
and undertake farm work for farmers on contract basis.
v) Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies
(FSS) and Large-sized Adivasi Multi-Purpose Societies (LAMPS) for on-lending to
agriculture.
Bnkad18. Sanjay v & mmk 47

vi) Loans sanctioned by banks to MFIs for on-lending to agriculture sector as per the
conditions specified in paragraph IX of this circular.
vii) Outstanding deposits under RIDF and other eligible funds with NABARD on account of
priority sector shortfall.
For the purpose of computation of 7 percent/ 8 percent target, Small and Marginal Farmers
will include the following:-
- Farmers with landholding of up to 1 hectare (Marginal Farmers). Farmers with a

landholding of more than 1 hectare and up to 2 hectares (Small Farmers).
- Landless agricultural labourers, tenant farmers, oral lessees and share-croppers, whose
share of landholding is within the limits prescribed for small and marginal farmers.
- Loans to Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of
individual Small and Marginal farmers directly engaged in Agriculture and Allied Activities,
provided banks maintain disaggregated data of such loans.
- Loans to farmers' producer companies of individual farmers, and co-operatives of

farmers directly engaged in Agriculture and Allied Activities, where the membership of
Small and Marginal Farmers is not less than 75 per cent by number and whose land-
holding share is also not less than 75 per cent of the total land-holding.
2. #MICRO, SMALL AND SMALL ENTERPRISES (MSMEs)
2.1 Manufacturing Enterprises
The Micro, Small and Medium Enterprises engaged in the manufacture or production of
goods to any industry specified in the first schedule to the Industries (Development and
Regulation) Act, 1951 and as notified by the Government from time to time. The
Manufacturing Enterprises are defined in terms of investment in plant and machinery.
2.2 Service Enterprises
Bank loans up to Rs. 5 crore per unit to Micro and Small Enterprises and Rs. 10 crore to
Medium Enterprises engaged in providing or rendering of services and defined in terms of
investment in equipment under MSMED Act, 2006.
2.3 Khadi and Village Industries Sector (KVI)
All loans to units in the KVI sector will be eligible for classification under the /7.5
percent prescribed for Micro Enterprises under priority sector.
2.4 Bank loans to food and agro processing units shall form part of agriculture.
2.5 Other Finance to MSMEs
i) Loans to entities involved in assisting the decentralized sector in the supply of inputs to
and marketing of outputs of artisans, village and cottage industries.
ii) Loans to co-operatives of producers in the decentralized sector viz. artisans, village and
cottage industries.
iii) Loans sanctioned by banks to MFIs for on-lending to MSME sector as per the conditions
specified in paragraph IX of this circular.
iv) Credit outstanding under General Credit Cards (including Artisan Credit Card, Laghu
Udyami Card, Swarojgar Credit Card, and Weaver’s Card etc. in existence and catering to
the non-farm entrepreneurial credit needs of individuals).
v) Overdrafts extended by banks after April 8, 2015 upto Rs. 5,000/- under Pradhan Mantri
Jan DhanYojana (PMJDY) accounts provided the borrower’s household annual income
does not exceed Rs.100,000/- for rural areas and Rs. 1,60,000/- for non-rural areas.
These overdrafts will qualify as achievement of the target for lending to Micro Enterprises.
vi) Outstanding deposits with SIDBI and MUDRA Ltd. on account of priority sector shortfall.
2.6 To ensure that MSMEs do not remain small and medium units merely to remain eligible for
priority sector status, the MSME units will continue to enjoy the priority sector lending
status up to three years after they grow out of the MSME category concerned.
2.7
As the MSMED Act, 2006 does not provide for clubbing of investments of different
enterprises set up by same person / company for the purpose of classification as Micro,
Small and Medium enterprises, therefore, the Gazette Notification No. S.O.2 (E) dated
January 1, 1993 on clubbing of investments of two or more enterprises under the same
ownership for the purpose of classification of industrial undertakings as SSI has been
rescinded vide GOI Notification No. S.O. 563 (E) dated February 27, 2009.

3. EXPORT CREDIT
The Export Credit extended as per the details below would be classified as priority sector.
Domestic banks Foreign banks with 20 Foreign banks with
branches and above less than 20 branches
Incremental export credit over Incremental export credit Export credit will be
corresponding date of the over corresponding date of allowed up to 32
preceding year, up to 2 percent the preceding year, up to 2 percent of ANBC or
of ANBC or Credit Equivalent percent of ANBC or Credit Credit Equivalent
Amount of Off-Balance Sheet Equivalent Amount of Off- Amount of Off-Balance
Exposure, whichever is higher, Balance Sheet Exposure, Sheet Exposure,
effective from April 1, 2015 whichever is higher, whichever is higher.
subject to a sanctioned limit of effective from April 1, 2017
up to Rs. 25 crore per borrower (As per their approved
to units having turnover of up to plans, foreign banks with
Rs. 100 crore. 20 branches and above are
allowed to count certain
percentage of export credit
limit as priority sector till
March 2017).
Export credit includes pre-shipment and post shipment export credit (excluding off-balance
sheet items) as defined in Master Circular on Rupee / Foreign Currency Export Credit and
Customer Service to Exporters issued by our Department of Banking Regulation.
4. EDUCATION
Loans to individuals for educational purposes including vocational courses upto Rs. 10
lakh irrespective of the sanctioned amount will be considered as eligible for priority sector.
5. HOUSING
i) Loans to individuals up to Rs. 28 lakh in metropolitan centres (with population of ten lakh
and above) and loans up to Rs. 20 lakh in other centres for purchase/construction of a
dwelling unit per family provided the overall cost of the dwelling unit in the metropolitan
centre and at other centres should not exceed Rs. 35 lakh and Rs. 25 lakh respectively.
The housing loans to banks’ own employees will be excluded. As housing loans which are
backed by long term bonds are exempted from ANBC, banks should either include such
housing loans to individuals up to ₹ 28 lakh in metropolitan centres and ₹ 20 lakh in other
centres under priority sector or take benefit of exemption from ANBC, but not both.
ii) Loans for repairs to damaged dwelling units of families up to Rs. 5 lakh in metropolitan
centres and up to Rs. 2 lakh in other centres.
iii) Bank loans to any governmental agency for construction of dwelling units or for slum
clearance and rehabilitation of slum dwellers subject to a ceiling of Rs. 10 lakh per
dwelling unit.
iv) The loans sanctioned by banks for housing projects exclusively for the purpose of
construction of houses for economically weaker sections and low income groups, the total
cost of which does not exceed Rs. 10 lakh per dwelling unit. For the purpose of identifying
the economically weaker sections and low income groups, the family income limit of Rs. 2
lakh per annum, irrespective of the location, is prescribed.
v) Bank loans to Housing Finance Companies (HFCs), approved by NHB for their refinance,
for on-lending for the purpose of purchase/construction/reconstruction of individual
dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to an
aggregate loan limit of Rs. 10 lakh per borrower.
The eligibility under priority sector loans to HFCs is restricted to five percent of the
individual bank’s total priority sector lending, on an ongoing basis. The maturity of bank
loans should be co-terminus with average maturity of loans extended by HFCs. Banks
should maintain necessary borrower-wise details of the underlying portfolio.
vi) Outstanding deposits with NHB on account of priority sector shortfall.
6. SOCIAL INFRASTRUCTURE
6.1 Bank loans up to a limit of Rs. 5 crore per borrower for building social infrastructure for
activities namely schools, health care facilities, drinking water facilities and sanitation
facilities including construction/ refurbishment of household toilets and household level
water improvements in Tier II to Tier VI centres.
6.2 Bank credit to Micro Finance Institutions (MFIs) extended for on-lending to individuals and
also to members of SHGs/JLGs for water and sanitation facilities will be eligible for
categorization as priority sector under ‘Social Infrastructure’, subject to the criteria laid
down in paragraph IX below:

7. RENEWABLE ENERGY
Bank loans up to a limit of Rs. 15 crore to borrowers for purposes like solar based power
generators, biomass based power generators, wind mills, micro-hydel plants and for non-
conventional energy based public utilities viz. street lighting systems, and remote village
electrification. For individual households, the loan limit will be Rs.10 lakh per borrower.
8. OTHERS
8.1 Loans not exceeding Rs. 50,000/- per borrower provided directly by banks to individuals
and their SHG/JLG, provided the individual borrower’s household annual income in rural
areas does not exceed Rs. 100,000/- and for non-rural areas it does not exceed Rs.
1,60,000/-.
8.2 Loans to distressed persons [other than farmers included under III (1.1) A (v)] not
exceeding Rs.100,000/- per borrower to prepay their debt to non-institutional lenders.
8.3 Loans sanctioned to State Sponsored Organisations for Scheduled Castes/ Scheduled
Tribes for the specific purpose of purchase and supply of inputs and/or the marketing of
the outputs of the beneficiaries of these organisations.
IV WEAKER SECTIONS
Priority sector loans to the following borrowers will be considered under Weaker Sections
category:-
No. Category
1. Small and Marginal Farmers
2. Artisans, village and cottage industries where individual credit limits do not exceed
Rs. 1 lakh
3. Beneficiaries under Government Sponsored Schemes such as National Rural
Livelihoods Mission (NRLM), National Urban Livelihood Mission (NULM) and Self
Employment Scheme for Rehabilitation of Manual Scavengers (SRMS)
4. Scheduled Castes and Scheduled Tribes
5. Beneficiaries of Differential Rate of Interest (DRI) scheme
6. Self Help Groups
7. Distressed farmers indebted to non-institutional lenders
8. Distressed persons other than farmers, with loan amount not exceeding Rs. 1 lakh
per borrower to prepay their debt to non-institutional lenders
9. Individual women beneficiaries up to Rs. 1 lakh per borrower
10. Persons with disabilities
11. Overdrafts upto Rs. 5,000/- under Pradhan Mantri Jan-DhanYojana (PMJDY)
accounts, provided the borrower’s household annual income does not exceed Rs.
100,000/- for rural areas and Rs. 1,60,000/- for non-rural areas
12. Minority communities as may be notified by Government of India from time to time.
In States, where one of the minority communities notified is, in fact, in majority, item (12)
will cover only the other notified minorities. These States/ Union Territories are Jammu &
Kashmir, Punjab, Meghalaya, Mizoram, Nagaland and Lakshadweep.
10 Investments by banks in securitised assets
i) Investments by banks in securitised assets, representing loans to various categories of
priority sector, except 'others' category, are eligible for classification under respective
categories of priority sector depending on the underlying assets provided:
a) the securitised assets are originated by banks and financial institutions and are eligible to
be classified as priority sector advances prior to securitisation and fulfil the Reserve Bank
of India guidelines on securitisation.
b) the all inclusive interest charged to the ultimate borrower by the originating entity should
not exceed the Base Rate of the investing bank plus 8 percent per annum.
The investments in securitised assets originated by MFIs, which comply with the
guidelines in Paragraph IX of this circular are exempted from this interest cap as there are
separate caps on margin and interest rate.
ii) Investments made by banks in securitised assets originated by NBFCs, where the
underlying assets are loans against gold jewellery, are not eligible for priority sector status.
11 Transfer of Assets through Direct Assignment /Outright purchases
i) Assignments/Outright purchases of pool of assets by banks representing loans under
various categories of priority sector, except the 'others' category, will be eligible for
classification under respective categories of priority sector provided:
a) the assets are originated by banks and financial institutions which are eligible to be
classified as priority sector advances prior to the purchase and fulfil the Reserve Bank of
India guidelines on outright purchase/assignment.
b) the eligible loan assets so purchased should not be disposed of other than by way of
repayment.
c) the all inclusive interest charged to the ultimate borrower by the originating entity should
not exceed the Base Rate of the purchasing bank plus 8 percent per annum.
The Assignments/Outright purchases of eligible priority sector loans from MFIs, which
comply with the guidelines in Paragraph IX of this circular are exempted from this interest
rate cap as there are separate caps on margin and interest rate.
ii) When the banks undertake outright purchase of loan assets from banks/ financial
institutions to be classified under priority sector, they must report the nominal amount
actually disbursed to end priority sector borrowers and not the premium embedded amount
paid to the sellers.
iii) Purchase/ assignment/investment transactions undertaken by banks with NBFCs, where
the underlying assets are loans against gold jewellery, are not eligible for priority sector
status.
12 Inter Bank Participation Certificates
Inter Bank Participation Certificates (IBPCs) bought by banks, on a risk sharing basis, shall
be eligible for classification under respective categories of priority sector, provided the
underlying assets are eligible to be categorized under the respective categories of priority
sector and the banks fulfill the Reserve Bank guidelines on IBPCs.
13 Priority Sector Lending Certificates
The outstanding priority sector lending certificates (after the guidelines are issued in this
regard by the Reserve Bank of India) bought by the banks will be eligible for classification
under respective categories of priority sector provided the assets are originated by banks,
and are eligible to be classified as priority sector advances and fulfil the Reserve Bank of
India guidelines on priority sector lending certificates.
14 Bank loans to MFIs for on-lending
a) Bank credit to MFIs extended for on-lending to individuals and also to members of SHGs /
JLGs will be eligible for categorisation as priority sector advance under respective
categories viz., Agriculture, Micro, Small and Medium Enterprises, Social Infrastructure
[mentioned in paragraph III(6.2)] and Others, provided not less than 85 percent of total
assets of MFI (other than cash, balances with banks and financial institutions, government
securities and money market instruments) are in the nature of “qualifying assets”. In
addition, aggregate amount of loan, extended for income generating activity, should be not
less than 50 percent of the total loans given by MFIs.
b) A “qualifying asset” shall mean a loan disbursed by MFI, which satisfies the following
criteria:
i) The loan is to be extended to a borrower whose household annual income in rural areas
does not exceed Rs.1,00,000/- while for non-rural areas it should not exceed Rs.
1,60,000/-.
ii) Loan does not exceed Rs. 60,000/- in the first cycle and Rs.100,000/- in the subsequent
cycles.
iii) Total indebtedness of the borrower does not exceed Rs. 1,00,000/-.
iv) Tenure of loan is not less than 24 months when loan amount exceeds Rs.30,000/- with
right to borrower of prepayment without penalty.
v) The loan is without collateral.
vi) Loan is repayable by weekly, fortnightly or monthly installments at the choice of the
borrower.
c) Further, the banks have to ensure that MFIs comply with the following caps on margin and
interest rate as also other ‘pricing guidelines’, to be eligible to classify these loans as
priority sector loans.
i) Margin cap: The margin cap should not exceed 10 percent for MFIs having loan portfolio
exceeding Rs. 100 crore and 12 percent for others. The interest cost is to be calculated on
average fortnightly balances of outstanding borrowings and interest income is to be
calculated on average fortnightly balances of outstanding loan portfolio of qualifying
assets.
ii) Interest cap on individual loans: With effect from April 1, 2014, interest rate on individual
loans will be the average Base Rate of five largest commercial banks by assets multiplied
by 2.75 per annum or cost of funds plus margin cap, whichever is less. The average of the
Base Rate shall be advised by Reserve Bank of India.
iii) three components are to be included in pricing of loans viz., (a) a processing fee not
Only
exceeding 1 percent of the gross loan amount, (b) the interest charge and (c) the
insurance premium.
iv) The processing fee is not to be included in the margin cap or the interest cap.
v) Only the actual cost of insurance i.e. actual cost of group insurance for life, health and
livestock for borrower and spouse can be recovered; administrative charges may be
recovered as per IRDA guidelines.

vi) There should not be any penalty for delayed payment.
vii) No Security Deposit/ Margin is to be taken.
d) The banks should obtain from MFI, at the end of each quarter, a Chartered Accountant’s
Certificate stating, inter-alia, that the criteria on (i) qualifying assets, (ii) the aggregate
amount of loan, extended for income generation activity, and (iii) pricing guidelines are
followed.
15 Monitoring of Priority Sector Lending targets
To ensure continuous flow of credit to priority sector, the compliance of banks will be
monitored on ‘quarterly’ basis. The data on priority sector advances has to be furnished by
banks at quarterly and annual intervals as per the reporting formats prescribed
vide Circular FIDD.CO.Plan.BC.No.17/04.09.001/2016-17 dated October 6, 2016 on
Priority Sector Lending – Revised Reporting System
16 Non-achievement of Priority Sector targets
Scheduled Commercial Banks having any shortfall in lending to priority sector
shall be allocated amounts for contribution to the Rural Infrastructure
Development Fund (RIDF) established with NABARD and other Funds with
NABARD/NHB/SIDBI/ MUDRA Ltd. , as decided by the Reserve Bank from time
to time. The achievement will be arrived at the end of financial year based on the
average of priority sector target /sub-target achievement as at the end of each
quarter.
While computing priority sector target achievement, shortfall / excess lending for
each quarter will be monitored separately. A simple average of all quarters will be
arrived at and considered for computation of overall shortfall / excess at the end
of the year. The same method will be followed for calculating the achievement of
priority sector sub-targets.
The interest rates on banks’ contribution to RIDF or any other Funds, tenure of
deposits, etc. shall be fixed by Reserve Bank of India from time to time.
The misclassifications reported by the Reserve Bank’s Department of Banking

Supervision would be adjusted/ reduced from the achievement of that year, to
which the amount of declassification/ misclassification pertains, for allocation to
various funds in subsequent years.
Non-achievement of priority sector targets and sub-targets will be taken into

account while granting regulatory clearances/approvals for various purposes.
17 Common guidelines for priority sector loans
Banks should comply with the following common guidelines for all categories of advances
under the priority sector.
(i) Rate of interest
The rates of interest on bank loans will be as per directives issued by our
Department of Banking Regulation from time to time.
(ii) Service charges
No loan related and adhoc service charges/inspection charges should be levied

on priority sector loans up to ₹25,000. In the case of eligible priority sector loans
to SHGs/ JLGs, this limit will be applicable per member and not to the group as a
whole.
(iii) Receipt, Sanction/Rejection/Disbursement Register
A register/ electronic record should be maintained by the bank, wherein the date
of receipt, sanction/rejection/disbursement with reasons thereof, etc., should be
recorded. The register/electronic record should be made available to all
inspecting agencies.

(iv) Issue of Acknowledgement of Loan Applications
Banks should provide acknowledgement for loan applications received under

priority sector loans. Bank Boards should prescribe a time limit within which the
bank communicates its decision in writing to the applicants.
Agricultural Loans Affected by Natural Calamities etc:

As per Clause 4.2.13 of the Master Circular on Prudential norms DBR.No.BP.BC.2/21.04.048/2015-16
dated 1-7-2015) where natural calamities impair the repaying capacity of agricultural borrowers,
i. banks may decide on their own as a relief measure conversion of the short-term production loan into a
term loan or re-schedulement of the repayment period; and the sanctioning of fresh short-term loan,
subject to guidelines contained in RBI Circular FIDD.No.FSD.BC.52/ 05.10.001/2014-15 dated March 25,
2015.
ii. the term loan as well as fresh short-term loan may be treated as current dues and need not be
classified as NPA and the revised terms and conditions will determine classification as NPA if interest
and/or instalment of principal remains overdue for two crop seasons for short duration crops and for
one crop season for long duration crops.
While fixing the repayment schedule in case of rural housing advances granted to agriculturists under
Indira Awas Yojana and Golden Jubilee Rural Housing Finance Scheme, banks should ensure that the
interest/ instalment payable on such advances are linked to crop cycles.
HOUSING FINANCE
(Reference may be made to the RBI Master Circular on Housing Finance
DBR.No.DIR.BC.13/08.12.001/2015-16 dated 1-7-2015). The Circular deals with:
1. VARIOUS REGULATIONS:
While formulating their policies, banks have to take into account the following RBI guidelines
and ensure that bank credit is used for production, constructions activities and not for
activities connected with speculation in real estate.
A) ACQUISITION OF LAND:
Bank finance granted only for purchase of a plot, provided a declaration is obtained from the
borrower that he intends to construct a house on the said plot, with the help of bank finance
or otherwise, within such period as may be laid down by the banks themselves.
B) CONSTRUCTION OF BUILDING / READY-BUILT HOUSE:
i) Banks may grant loans to individuals for purchase/construction of dwelling unit per family and
loans given for repairs to the damaged dwelling units of families.
ii) Bank may extend finance to a person who already owns a house in town/village where he
resides, for buying/ constructing a second house in the same or other town/ village for the
purpose of self occupation.
iii) Bank may extend finance for purchase of a house by a borrower who proposes to let it out on
rental basis on account of his posting outside the headquarters or because he has been
provided accommodation by his employer.
iv) Bank may extend finance to a person who proposes to buy an old house where he is
presently residing as a tenant.
v) Banks may finance for construction meant for improving the conditions in slum areas for
which credit may be extended directly to the slum-dwellers on the guarantee of the
Government, or indirectly to them through the State Governments.
vi) Bank may provide credit for slum improvement schemes to be implemented by Slum
Clearance Boards and other public agencies.
vii) Banks are advised to also adhere to the following conditions, in the light of the observations
of Delhi High Court on unauthorized construction:
(a) In cases where the applicant owns a plot/land and approaches the banks/FIs for a credit
facility to construct a house, a copy of the sanctioned plan by competent authority in the
name of a person applying for such credit facility must be obtained by the Banks/FIs
before sanctioning the home loan.
(b) An affidavit-cum-undertaking must be obtained from the person applying for such credit
facility that he shall not violate the sanctioned plan, construction shall be strictly as per
the sanctioned plan and it shall be the sole responsibility of the executants to obtain
completion certificate within 3 months of completion of construction, failing which the
bank shall have the power and the authority to recall the entire loan with interest, costs
and other usual bank charges.
(c) An Architect appointed by the bank must also certify at various stages of construction of
building that the construction of the building is strictly as per sanctioned plan and shall
also certify at a particular point of time that the completion certificate of the building
issued by the competent authority has been obtained.
(d) In cases where the applicant approaches the bank/FIs for a credit facility to purchase
the built up house/flat, it should be mandatory for him to declare by way of an affidavit-
cum-undertaking that the built up property has been constructed as per the sanctioned
plan and/or building bye-laws and as far as possible has a completion certificate also.
(e) An Architect appointed by the bank must also certify before disbursement of the loan
that the built up property is strictly as per sanctioned plan and/or building bye-laws.
(f) No loan should be given in respect of those properties which fall in the category of
unauthorized colonies unless and until they have been regularized and development
and other charges paid.
(g) No loan should also be given in respect of properties meant for residential use but which
the applicant intends to use for commercial purposes and declares so while applying for
loan.
viii) Supplementary Finance:
(a) Banks may consider requests for additional finance within the overall ceiling for carrying
out alterations/ additions/repairs to the house/flat already financed by them.
(b) In the case of individuals who might have raised funds for construction/ acquisition of
accommodation from other sources and need supplementary finance, banks may
extend such finance after obtaining paripassu or second mortgage charge over the
property mortgaged in favour of other lenders and/or against such other security, as
they may deem appropriate.
(c) Banks may consider for grant of finance to –
- the bodies constituted for undertaking repairs to houses, and
- the owners of building/house/flat, whether occupied by themselves or by tenants, to
meet the need-based requirements for their repairs/additions, after satisfying
themselves regarding the estimated cost (for which requisite certificate should be
obtained from an Engineer / Architect, wherever necessary) and obtaining such
security as deemed appropriate.
ix) Bank finance should, however, not be granted for the following:
(a) Banks should not grant finance for construction of buildings meant purely for
Government/Semi-Government offices, including Municipal and Panchayat offices.
However, banks may grant loans for activities, which will be refinanced by institutions
like NABARD.
(b) Projects undertaken by public sector entities which are not corporate bodies (i.e. public
sector undertakings which are not registered under Companies Act or which are not
Corporations established under the relevant statute) may not be financed by banks.
Even in respect of projects undertaken by corporate bodies, as defined above, banks
should satisfy themselves that the project is run on commercial lines and that bank
finance is not in lieu of or to substitute budgetary resources envisaged for the project.
The loan could, however, supplement budgetary resources if such supplementing was
contemplated in the project design. Thus, in the case of a housing project, where the
project is run on commercial lines, and the Government is interested in promoting the
project either for the benefit of the weaker sections of the society or otherwise, and a
part of the project cost is met by the Government through subsidies made available
and/or contributions to the capital of the institutions taking up the project, the bank
finance should be restricted to an amount arrived at after reducing from the total project
cost the amount of subsidy/capital contribution receivable from the Government and
any other resources proposed to be made available by the Government.
(c) Banks had, in the past, sanctioned term loans to Corporations set up by Government
like State Police Housing Corporation, for construction of residential quarters for
allotment to employees where the loans were envisaged to be repaid out of budgetary
allocations. As these projects cannot be considered to be run on commercial lines, it
would not be in order for banks to grant loans to such projects.
C LENDING TO HOUSING INTERMEDIARY AGENCIES:
i) Financing of Land Acquisition:
(a) In view of the need to increase the availability of land and house sites for increasing
the housing stock in the country, banks may extend finance to public agencies and
not private builders for acquisition and development of land, provided it is a part of
the complete project, including development of infrastructure such as water systems,
drainage, roads, provision of electricity, etc. Such credit may be extended by way of
term loans. The project should be completed as early as possible and, in any case,
within three years, so as to ensure quick re-cycling of bank funds for optimum
results. If the project covers construction of houses, credit extended therefore in
respect of individual beneficiaries should be on the same terms and conditions as
stipulated for financing the beneficiary directly.

(b) Banks should have a Board approved policy in place for valuation of properties
including collaterals accepted for their exposures and that valuation should be done
by professionally qualified independent valuers.
(c) As regards the valuation of land for the purpose of financing of land acquisition as
also land secured as collateral, banks may be guided as under:
- Banks may extend finance to public agencies and not to private builders for
acquisition and development of land, provided it is a part of the complete project,
including development of infrastructure such as water systems, drainage, roads,
provision of electricity, etc. In such limited cases where land acquisition can be
financed, the finance is to be limited to the acquisition price (current price) plus
development cost. The valuation of such land as prime security should be limited
to the current market price.
- Wherever land is accepted as collateral, valuation of such land should be at the
current market price only.
ii) Lending to Housing Finance Institutions:
Banks may grant term loans to housing finance institutions taking into account (long-term)
debt-equity ratio, track record, recovery performance and other relevant factors including the
other applicable regulatory guidelines.
iii) Lending to Housing Boards and Other Agencies:
Banks may extend term loans to state level housing boards and other public agencies.
However, in order to develop a healthy housing finance system, while doing so, the banks
must not only keep in view the past performance of these agencies in the matter of recovery
from the beneficiaries but they should also stipulate that the Boards will ensure prompt and
regular recovery of loan installments from the beneficiaries.
iv) Term Loans to Private Builders:
(a) In view of the important role played by professional builders as providers of construction
services in the housing field, especially where land is acquired and developed by State
Housing Boards and other public agencies, commercial banks may extend credit to
private builders on commercial terms by way of loans linked to each specific project.
(b) Banks however, are not permitted to extend fund based or non-fund based facilities to
private builders for acquisition of land even as part of a housing project.
(c) The period of credit for loans extended by banks to private builders may be decided by
banks themselves based on their commercial judgment subject to usual safeguards and
after obtaining such security, as banks may deem appropriate.
(d) Such credit may be extended to builders of repute, employing professionally qualified
personnel. It should be ensured, through close monitoring, that no part of such funds is
used for any speculation in land.
(e) Care should also be taken to see that prices charged from the ultimate beneficiaries do
not include any speculative element that is, prices should be based only on the
documented price of land, the actual cost of construction and a reasonable profit
margin.
v) Terms and Conditions for Lending to Housing Intermediary Agencies:
(a) In order to enhance the flow of resources to housing sector, term loans may be granted
by banks to housing intermediary agencies against the direct loans sanctioned/
proposed to be sanctioned by the latter, irrespective of the per borrower size of the loan
extended by these agencies.
(b) Banks can grant term loans to housing intermediary agencies against the direct loans
sanctioned/proposed to be sanctioned by them to Non-Resident Indians also. However,
banks should ensure that housing finance intermediary agencies being financed by
them are authorised by RBI to grant housing loans to NRIs as all housing finance
intermediaries are not authorised by RBI to provide housing finance to NRIs.
(c) Banks have freedom to charge interest rates to housing intermediary agencies without
reference to Benchmark Prime Lending Rates (BPLR) upto June 30, 2010. Under the
Base Rate System effective from July 1, 2010, all categories of loans will be priced with
reference to Base Rate which is the minimum interest rate for all loans.
vi) Adherence to guidelines on Commercial Real Estate (CRE) exposure:
Lending to housing intermediary agencies will be subject to the guidelines on commercial real
estate exposure.

2. QUANTUM OF LOAN:
(a) While deciding the quantum of loan to be granted as housing finance, banks should
ensure that the LTV ratio for loans are as under:
Category of Loan LTV Ratio (%)
(a) Individual Housing Loans
Upto Rs. 20 lakh 90
Above Rs. 20 lakh & upto Rs. 75 lakh 80
Above Rs. 75 lakh 75
(b) CRE – RH NA
(b) In order to have uniformity in the practices adopted for deciding the value of the house
property while sanctioning housing loans, banks should not include stamp duty,
registration and other documentation charges in the cost of the housing property they
finance so that the effectiveness of LTV norms is not diluted.
(c) However, in cases where the cost of the house/dwelling units does not exceed Rs.10
lakh, bank may add stamp duty, registration and other documentation charges to the
cost of the house/dwelling unit for the purpose of calculating LTV ratio.
(d) It has been observed that some banks have introduced certain innovative Housing Loan
Schemes in association with developers / builders, e.g. upfront disbursal of sanctioned
individual housing loans to the builders without linking the disbursals to various stages
of construction of housing project, Interest/EMI on the housing loan availed of by the
individual borrower being serviced by the builders during the construction period/
specified period, etc. This might include signing of tripartite agreement between the
bank, the builder and the buyer of the housing unit. These loans products are popularly
known by various names like 80:20, 75:25 schemes.
(e) Such housing loan products are likely to expose the banks as well as their home loan
borrowers to additional risks e.g. in case of dispute between individual borrowers and
developers/builders, default/ delayed payment of interest/ EMI by the developer/ builder
during the agreed period on behalf of the borrower, non-completion of the project on
time etc. Further, any delayed payments by developers/ builders on behalf of individual
borrowers to banks may lead to lower credit rating/ scoring of such borrowers by credit
information companies (CICs) as information about servicing of loans get passed on to
the CICs on a regular basis. In cases, where bank loans are also disbursed upfront on
behalf of their individual borrowers in a lump-sum to builders/ developers without any
linkage to stages of constructions, banks run disproportionately higher exposures with
concomitant risks of diversion of funds.
(f) Banks are advised that disbursal of housing loans sanctioned to individuals should be
closely linked to the stages of construction of the housing project / houses and upfront
disbursal should not be made in cases of incomplete / under-construction / green field
housing projects.
(g) However, in cases of projects sponsored by Government/Statutory Authorities, banks
may disburse the loans as per the payment stages prescribed by such authorities, even
where payments sought from house buyers are not linked to the stages of constructions,
provided such authorities have no past history of non-completion of projects.
(h) It is emphasized that banks while introducing any kind of product should take into
account the customer suitability and appropriateness issues and also ensure that the
borrowers/ customers are made fully aware of the risks and liabilities under such
products.
3. APPROVALS FROM STATUTORY/ REGULATORY AUTHORITIES:
While appraising loan proposals involving real estate, banks should ensure that the borrowers should
have obtained prior permission from government / local governments / other statutory authorities for the
project, wherever required. In order that the loan approval process is not hampered on account of this,
while the proposals could be sanctioned in normal course, the disbursements should be made only after
the borrower has obtained requisite clearances from the government authorities.
4. FINANCING OF AFFORDABLE HOUSING-ISSUE OF LONG TERM BONDS BY BANKS:
Banks can issue long-term bonds with a minimum maturity of seven years to raise resources for lending
to affordable housing subject to the conditions mentioned in circular DBR.BP.BC.No.25/08.12.014/2014-
15 dated July 15, 2014 on “ Issue of Long term Bonds by Banks- Financing of Infrastructure and
Affordable Housing”.
5. ADDITIONAL GUIDELINES:
It is advised that banks should adhere to the National Building Code (NBC) formulated by the Bureau of
Indian Standards (BIS) in view of the importance of safety of buildings especially against natural
disasters. Banks may consider this aspect for incorporation in their loan policies. Banks should also adopt
the National Disaster Management Authority (NDMA) guidelines and suitably incorporate them as part of
their loan policies, procedures and documentation.

STATUTORY AND REGULATORY RESTRICTIONS
2.2 Regulatory Restrictions
2.2.1 Granting loans and advances to relatives (as defined) of Directors

Unless sanctioned by the Board of Directors/Management Committee, and subject to disclosure of
the interest by the director concerned and non participation in the resolution, banks should not grant
loans and advances# or awarding of contracts aggregating Rs. 25 lakhs and above to -
(a) directors (including the Chairman/Managing Director) of other banks *;
(b) any firm in which any of the directors of other banks * is interested as a partner
or guarantor; and
(c) any company in which any of the directors of other banks * holds substantial
interest or is interested as a director or as a guarantor.
(d) any relative other than spouse and minor/dependent children of their own Chairman/Managing
Directors or other Directors;
(e) any relative other than spouse and minor/dependent children of the Chairman/Managing
Director or other directors of other banks *;
(f) any firm in which any of the relatives other than spouse and minor/dependent children as
mentioned in (c) & (d) above is interested as a partner or guarantor; and
(g) any company in which any of the relatives other than spouse and minor/dependent children as
mentioned in (c) & (d) above hold substantial interest** or is interested as a director or as a
guarantor.
* includes directors of Scheduled Co-operative Banks, subsidiaries/trustees of mutual
funds/venture capital funds.
# excludes loans or advances against:
 Government securities
 Life insurance policies
 Fixed or other deposits
 Stocks and shares
 Temporary overdrafts for small amounts, i.e. upto Rs. 25,000/-
 Casual purchase of cheques up to Rs. 5,000 at a time
 Housing loans, car advances, etc. granted to an employee of the bank under any scheme
applicable generally to employees.
** ‘substantial interest’ as defined in Section 5 (ne) of the Banking Regulation Act, 1949.
(i) Every borrower should furnish a declaration to the bank to the effect that
a) (where the borrower is an individual) he is not a director or specified near relation of
director of a banking company;
b) (where the borrower is a partnership firm) none of the partners is a director or specified
near relation of a director of a banking company; and
c) (where the borrower is a joint stock company) none of its directors, is a director or
specified near relation of a director of a banking company.
(ii) The declaration should also give details of the relationship of the borrower to the director
of the bank.
2.2.2 Restrictions on Grant of Loans & Advances to Officers and Relatives of Senior Officers of
Banks
(i) Loans & advances to officers of the bank
(ii) Loans and advances and award of contracts to relatives of senior officers of the bank
Credit facilities sanctioned to senior officers of the financing bank should be reported to
the Board.
2.2.3 Restrictions on Grant of Financial Assistance to Industries Producing / Consuming Ozone
Depleting Substances (ODS)
Restrictions on Advances against Sensitive Commodities under Selective Credit Control
2.2.4
(SCC)
With a view to preventing speculative holding of essential commodities with the help of bank credit
and the resultant rise in their prices, in exercise of powers conferred by Section 21 & 35A of the
Banking Regulation Act, 1949, the Reserve Bank of India, being satisfied that it is necessary and
expedient in the public interest to do so, issues, from time to time, directives to all commercial
banks, stipulating specific restrictions on bank advances against specified sensitive commodities.
The commodities, generally treated as sensitive commodities are the following:
(a) food grains i.e. cereals and pulses,
(b) selected major oil seeds indigenously grown, viz. groundnut, rapeseed/mustard, cottonseed,
linseed and castor seed, oils thereof, vanaspati and all imported oils and vegetable oils,
(c) raw cotton and kapas,

(d) sugar/gur/khandsari,
(e) cotton textiles which include cotton yarn, man-made fibres and yarn and fabrics made out
of man-made fibres and partly out of cotton yarn and partly out of man-made fibres
Banks are free to fix prudential margins on advances against these sensitive commodities. However,
in case of advance against Levy Sugar, a minimum margin of 10% will apply.
(ii) Valuation of sugar stocks

(a) The unreleased stocks of the levy sugar charged to banks as security by the sugar mills shall be
valued at levy price fixed by Government.
(b) The unreleased stocks of free sale sugar including buffer stocks of sugar charged to the bank as
security by sugar mills, shall be valued at the average of the price realised in the preceding three
months (moving average) or the current market price, whichever is lower; the prices for this
purpose shall be exclusive of excise duty.
2.2.5 Restriction on payment of commission to staff members including officers
2.2.6 Restrictions on offering incentives on any banking products
2.3 Restrictions on other loans and advances
2.3.1 Loans and Advances against Shares, Debentures and Bonds
2.3.2 Advances against Fixed Deposit Receipts (FDRs) Issued by Other Banks
2.3.3 Advances to Agents/Intermediaries based on consideration of Deposit Mobilisation
2.3.4 Loans against Certificate of Deposits (CDs)
2.3.5 Finance for and Loans / Advances against Indian Depository Receipts(IDRs)
2.3.6 Bank Finance to Non-Banking Financial Companies (NBFCs)
2.3.7 Financing Infrastructure/ Housing Projects
2.3.8 Issue of Bank Guarantees in favour of Financial Institutions
2.3.9 Discounting/Rediscounting of Bills by Banks
2.3.10 Advances for purchase of gold and lending against gold Bullion/coins/ Primary gold
2.3.11 Advances against Gold Ornaments & Jewellery
2.3.12 Gold (Metal) Loans
2.3.13 Loans and advances to Real Estate Sector
2.3.14 Loans and advances to Micro & Small Enterprises (MSEs)
2.3.15 Loan system for delivery of bank credit
2.3.16 Lending under Consortium Arrangement/Multiple Banking Arrangement
2.3.17 Working Capital Finance to Information Technology and Software Industry
2.3.18 Guidelines for bank finance for PSU disinvestments of Government of India
2.3.19 Grant of Loans for acquisition of Kisan Vikas Patras (KVPs)
2.3.20 7% Savings Bonds, 2002; 6.5% Savings Bonds 2003 ( Non-Taxable) and 8% Savings (Taxable)
Bonds 2003- Collateral Facility
2.3.21 Guidelines on Settlement of Non Performing Assets-Obtaining Consent Decree from Court
2.3.22 Project Finance Portfolio of Banks
2.3.23 Bridge Loans against receivables from Government
2.3.24 Fund/Non-Fund based credit Facilities to Overseas Joint Ventures/Wholly –owned Subsidiaries
Abroad and overseas Step- down Subsidiaries of Indian Companies
2.4 Transfer of borrowal accounts from one bank to another
2.5 Guidelines on Fair Practices Code for Lenders
2.5.1 Fair Practices Code duly approved by their Board of Directors that needs to be followed
Guidelines
2.5.2
i. Applications for loans and their processing
(a) Loan application forms ( all categories of loans irrespective of the amount of loan sought by
the borrower )should be comprehensive and to include information about the fees/charges,
(b) system of giving acknowledgement for receipt of all loan applications
(c) Timelines for Credit Decisions
(d) loan applications to be verified within a reasonable period of time
(e) lenders to convey the main reason/reasons that have led to rejection of the loan
applications
ii. Loan appraisal and terms/conditions
iii. Disbursement of loans including changes in terms and conditions
iv. Post disbursement supervision
General
2.6 Guidelines on Recovery Agents engaged by banks

#Micro, Small & Medium Enterprises (MSME) Sector
RBI Master Circular No. FIDD.CO.Plan.BC.4/04.09.01/2015-16 dated 1-7-2015 and also RBI Master
Directions FIDD.MSME & NFS.12/06.02.31/2017-18 dated 24-7-2017 deals with Lending to Micro, Small &
Medium Enterprises (MSME) Sector and defines such enterprises as under:
Definition of Enterprises engaged in
enterprises
manufacture or production, providing or rendering of services
processing or preservation of
goods **
Where investment in plant and whose investment in equipment

machinery (original cost (original cost excluding land and
excluding land and building and building and furniture, fittings and
the items specified by the other items not directly related to the
Ministry of Small Scale service rendered or as may be notified
Industries) under the MSMED Act, 2006)
micro does not exceed Rs. 25 lakh does not exceed Rs. 10 lakh
enterprise
small more than Rs. 25 lakh but does is more than Rs.10 lakh but does not
enterprise not exceed Rs. 5 crore exceed Rs. 2 crore
medium more than Rs.5 crore but does not Is more than Rs. 2 crore but does not
enterprise@ exceed Rs.10 crore. exceed Rs. 5 crore
@ Lending to medium enterprises will not be included for the purpose of reckoning of advances
under the priority sector.
ADVANCES SUBJECT TO RESTRUCTURING

(Refer Part B of RBI Master Circular DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015)
A restructured account is one where the bank, for economic or legal reasons relating to the borrower's
financial difficulty, grants to the borrower concessions that the bank would not otherwise consider.
Restructuring would normally involve modification of terms of the advances / securities, which would
generally include, inter alia, alteration of repayment period / repayable amount/ the amount of installments /
rate of interest (due to reasons other than competitive reasons).
However, extension in repayment tenor of a floating rate loan on reset of interest rate, so as to keep the
EMI unchanged provided it is applied to a class of accounts uniformly will not render the account to be
classified as ‘Restructured account’. In other words, extension or deferment of EMIs to individual borrowers
as against to an entire class, would render the accounts to be classified as 'restructured accounts.
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’
i.e., adherence to the terms and conditions stipulated during the 'specified period' (one year from
the date when the first payment of interest or installment of principal falls due under the terms of
restructuring package).
SATISFACTORY PERFORMANCE (Annexure 5)

NON AGRICULTURAL ACCOUNTS No overdues at the end of the specified period; and
-Cash Credit Accounts -should not be out of order any time during the
specified period, for a duration of more than 90
days
-Term Loans -no overdues for a period of more than 90 days.
AGRICULTURAL ACCOUNTS at the end of the specified period the account
should be regular.
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 from the
commencement of the first payment of interest or principal, whichever is later, on the credit facility with
longest period of moratorium under the terms of restructuring package.

However, in the case of accounts where the pre restructuring facilities were classified as 'sub-standard' and
'doubtful', interest income on the additional finance (treated as standard) 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.
Subsequent restructuring
In case a restructured asset is subject to subsequent restructuring:
 If a standard asset, it should be classified as substandard.
 If a sub-standard or a doubtful asset, 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 occasions may be allowed to be
upgraded to standard category after one year from the commencement of the first payment of interest
or principal, whichever is later, on the credit facility with longest period of moratorium under the terms of
restructuring package. subject to satisfactory performance.
Provisioning norms
a) Provision on restructured advances
(i) Banks will hold provision against the restructured advances as per the extant provisioning norms.
(ii) Restructured accounts classified as standard advances will attract a higher provision (as prescribed
from time to time) in the first two years from the date of restructuring. In cases of moratorium on
payment of interest/principal after restructuring, such advances will attract the prescribed higher
provision for the period covering moratorium and two years thereafter.
(iii) Restructured accounts classified as non-performing assets, when upgraded to standard category
will attract a higher provision (as prescribed from time to time) in the first year from the date of
upgradation.
(iv) The above-mentioned higher provision on restructured standard in a phased manner for the stock
of restructured standard accounts and will be 5.00 per cent - - with effect from March 31, 2016
b. Provision for diminution in the fair value of restructured advances
(i) Reduction in the rate of interest and / or reschedulement of the repayment of principal amount, as
part of the restructuring, will result in diminution in the fair value of the advance. The sacrifice is to
be measured and provisions for the same are to be debited to Profit & Loss Account. Such
provision should be held in addition to the provisions as per existing provisioning norms
in an account distinct from that for normal provisions.
Erosion in the fair value of the advance should be computed as the difference between the fair
value of the loan before and after restructuring. Fair value of the loan before restructuring will be
computed as the present value of cash flows representing the interest at the existing rate charged
on the advance before restructuring and the principal, discounted at a rate equal to the bank's
BPLR or Base Rate (whichever is applicable to the Borrower) as on the date of restructuring plus
the appropriate term premium and credit risk premium for the borrower category on the date of
restructuring. Fair value of the loan after restructuring will be computed as the present value of
cash flows representing the interest at the rate charged on the advance on restructuring and the
principal, discounted at a rate equal to the bank's BPLR or Base Rate (whichever is applicable to
the Borrower) as on the date of restructuring plus the appropriate term premium and credit risk
premium for the borrower category on the date of restructuring.
Provisions required as above arise due to the action of the banks resulting in change in
contractual terms of the loan upon restructuring which are in the nature of financial concessions.
(ii) divergences in the calculation of diminution of fair value of accounts could occur if banks are not
appropriately factoring in the term premium on account of elongation of repayment period on
restructuring. In such a case the term premium used while calculating the present value of cash
flows after restructuring would be higher than the term premium used while calculating the present
value of cash flows before restructuring. Further, the amount of principal converted into
debt/equity instruments on restructuring would need to be held under AFS and valued as per
usual valuation norms.
Since these instruments are getting marked to market, the erosion in fair value gets captured on
such valuation. Therefore, for the purpose of arriving at the erosion in the fair value, the NPV
calculation of the portion of principal not converted into debt/equity has to be carried out
separately. However, the total sacrifice involved for the bank would be NPV of the above portion
plus valuation loss on account of conversion into debt/equity instruments.
Banks are therefore advised that they should correctly capture the diminution in fair value of
restructured accounts as it will have a bearing not only on the provisioning required to be made by
them but also on the amount of sacrifice required from the promoters (Ref. para 20.2.2.iv).
Further, there should not be any effort on the part of banks to artificially reduce the net present
value of cash flows by resorting to any sort of financial engineering. Banks are also advised to put
in place a proper mechanism of checks and balances to ensure accurate calculation of erosion in
the fair value of restructured accounts.
(iii) In the case of working capital facilities, the diminution in the fair value of the cash credit /
overdraft component may be computed as indicated in para (i) above, reckoning the higher
of the outstanding amount or the limit sanctioned as the principal amount and taking the
tenor of the advance as one year. The term premium in the discount factor would be as
applicable for one year. The fair value of the term loan components (Working Capital Term Loan
and Funded Interest Term Loan) would be computed as per actual cash flows and taking the term
premium in the discount factor as applicable for the maturity of the respective term loan
components.
(iv) In the event any security is taken in lieu of the diminution in the fair value of the advance, it should
be valued at Re.1/- till maturity of the security. This will ensure that the effect of charging off the
economic sacrifice to the Profit & Loss account is not negated.
(v) The diminution in the fair value is to be re-computed on each balance sheet date till satisfactory
completion of all repayment obligations and full repayment of the outstanding in the account, so
as to capture the changes in the fair value on account of changes in BPLR or Base Rate
(whichever is applicable to the Borrower), term premium and the credit category of the borrower.
Consequently, banks may provide for the shortfall in provision or reverse the amount of excess
provision held in the distinct account.
(vi) If due to lack of expertise / appropriate infrastructure, a bank finds it difficult to ensure computation
of diminution in the fair value of advances, as an alternative to the methodology prescribed above
for computing the amount of diminution in the fair value, banks will have the option of notionally
computing the amount of diminution in the fair value and providing therefor, at five percent of the
total exposure, in respect of all restructured accounts where the total dues to bank(s) are less
than rupees one crore.
The total provisions required against an account (normal provisions plus provisions in lieu of
diminution in the fair value of the advance) are capped at 100% of the outstanding debt amount.
Conversion of Principal or unpaid interest into Debt / Equity – classify in the same status as the
restructured advance – provisions of paras are somewhat different.
4.2.5 Upgradation of loan accounts classified as NPAs
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 17.2 and 20.2 in Part B of the Circular will
be applicable.
Consequently, banks which have wrongly recognised income in the past should reverse the interest if
it was recognised as income during the current year or make a provision for an equivalent amount if it
was recognised as income in the previous year(s). As regards the regulatory treatment of ‘funded
interest’ recognised as income and ‘conversion into equity, debentures or any other
instrument’ banks should adopt the following:
a) Funded Interest: Income recognition in respect of the NPAs, regardless of whether these are or are not
subjected to restructuring/ rescheduling/ renegotiation of terms of the loan agreement, should be done
strictly on cash basis, only on realisation and not if the amount of interest overdue has been funded. If,
however, the amount of funded interest is recognised as income, a provision for an equal amount
should also be made simultaneously. In other words, any funding of interest in respect of NPAs, if
recognised as income, should be fully provided for.
b) Conversion into equity, debentures or any other instrument:

Asset Classification norms
17.2.5 Any additional finance may be treated as 'standard asset', up to a period of one year from the
commencement of the first payment of interest or principal, whichever is later, on the credit facility
with longest period of moratorium under the terms of 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.
17.2.6 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 commencement of the first payment of
interest or principal, whichever is later, on the credit facility with longest period of moratorium
under the terms of restructuring package. subject to satisfactory performance.
Income recognition norms
17.3 Subject to provisions of paragraphs 17.2.5, 18.2 and 19.2, interest income in respect of
restructured accounts classified as 'standard assets' will be recognized on accrual basis and that
in respect of the accounts classified as 'non-performing assets' will be recognized on cash basis.
19.2.2 The unrealised income represented by FITL / Debt or equity instrument should have a
corresponding credit in an account styled as "Sundry Liabilities Account (Interest
Capitalization)".
19.2.3 In the case of conversion of unrealised interest income into equity, which is quoted, interest
income can be recognized after the account is upgraded to standard category at market value of
equity, on the date of such up gradation, not exceeding the amount of interest converted into
equity.
19.2.4 Only on repayment in case of FITL or sale / redemption proceeds of the debt / equity instruments,
the amount received will be recognized in the P&L Account, while simultaneously reducing the
balance in the "Sundry Liabilities Account (Interest Capitalisation)".
19.2.5 It is learnt that banks have not uniformly adhered to these instructions. It is reiterated that
whenever the unrealised interest income of a loan is converted into FITL / Debt or equity
instrument, banks must have a corresponding credit in an account styled as "Sundry
Liabilities Account (Interest Capitalization). Banks are advised to strictly adhere to these
instructions and rectify the position, if required, before finalising their balance sheets for
the financial year 2013-14.
In line with the General Principles and Prudential Norms for Restructured Advances, information in
a structured format can be collated for the purpose of examination of the advances to verify
provisions and income recognition, as also dealt with in Section E and the formats recommended
(Section A- Annexure IV)
General Problem
There is a tendency to evergreen the accounts in the garb of restructuring, which is brought out
even by the RBI AFIs, where the RBI is taking a stand by interpreting its own instructions, that it is
a repeated restructuring
Building in all the fluid and frequently changing parameters in the CBS may be a difficult
proposition, and this cannot be checked within the severe time constraints and often there is no IS
Audit confirmation to this.
There is incentive for quick implementation of the restructuring package, as though the quickness
cures the risk of recovery. Provisions are at lower levels than those that would have been
applicable but for the regulatory requirements for retention/upgradation of such problem/weak
accounts in a better classification.

F
BANK AUDIT - ACCOUNTING STANDARDS (ASs) ISSUED BY THE ICAI
Accounting Standards (mandatory)
AS 1 Disclosure of Accounting Policies

AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
AS 5 Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies
AS 7 Construction Contracts
AS 9 Revenue Recognition
AS 10 Property, Plant and Equipment
AS 11 The Effects of Changes in Foreign Exchange Rates
AS 12 Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 15 Employee Benefits
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases
AS 20 Earnings Per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income
AS 23 Accounting for Investments in Associates
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Note: ICAI has also issued Accounting Standard Interpretations (ASI) under the authority of the
Accounting Standard Board and of the Council.

Indian Accounting Standards (IND ASs) F.1

Given hereunder, is the status of the final Indian Accounting Standards (Ind ASs) as at 31.01.2016,
finalised by the Council of the ICAI and notified by the Ministry of Corporate Affairs vide its notifications
dated February 16, 2016, Mrach 30, 2016 and March 17, 2017. Changes in the Ind AS vis. a vis.
corresponding IAS/IFRS are given in Appendix 1 appearing at the end of each Ind AS.
S. No. Ind AS Subject
1 101 First-time Adoption of Indian Accounting Standards
2 102 Share based Payment
3 103 Business Combinations
4 104 Insurance Contracts
5 105 Non-current Assets Held for Sale and Discontinued Operations
6 106 Exploration for and Evaluation of Mineral Resources
7 107 Financial Instruments: Disclosures
8 108 Operating Segments
9 109 Financial Instruments
10 110 Consolidated Financial Statements
11 111 Joint Arrangements
12 112 Disclosure of Interests in Other Entities
13 113 Fair Value Measurement
14 114 Regulatory Deferral Accounts
15 115 Revenue from Contracts with Customers
16 1 Presentation of Financial Statements
17 2 Inventories
18 7 Statement of Cash Flows
19 8 Accounting Policies, Changes in Accounting Estimates and Errors
20 10 Events after the Reporting Period
21 12 Income Taxes
22 16 Property, Plant and Equipment
23 17 Leases
24 19 Employee Benefits
25 20 Accounting for Government Grants and Disclosure of Government
Assistance
26 21 The Effects of Changes in Foreign Exchange Rates
27 23 Borrowing Costs
28 24 Related Party Disclosures
29 27 Separate Financial Statements
30 28 Investments in Associates and Joint Ventures
31 29 Financial Reporting in Hyperinflationary Economies
32 32 Financial Instruments: Presentation
33 33 Earnings per Share
34 34 Interim Financial Reporting
35 36 Impairment of Assets
36 37 Provisions, Contingent Liabilities and Contingent Assets
37 38 Intangible Assets
38 40 Investment Property
39 41 Agriculture
th
Extracts from the Notification (GSR dated 16 February, 2015), Issued by the Ministry of Corporate
Affairs, Government of India also refer RBI circular no.DBR.BP.BC.No.106/21.07.001/2015-16 dated June
23, 2016
The Central Government in consultation with the National Advisory Committee on Accounting Standards
st
made the “Companies (Indian Accounting Standards) Rules, 2015”, which shall come into force from 1
April, 2015.
Rule 5
The insurance companies, banking companies and non-banking finance companies shall not be required
to apply Indian Accounting Standards (Ind AS) for preparation of their financial statements either
voluntarily or mandatorily as specified in Rule 4 (1).
Rule 4 (1) requires the specified companies and their auditors to comply with the Indian Accounting
Standards in the preparation of their financial statements and audit respectively based on the criteria of
net worth and whose securities are listed or in the process of listing.
F .II
Auditing, Review and Other Standards (formerly known as AAS) (as updated on 20-04-2017)
Standards on Quality Control (SQCs)
 SQC 1, “Quality Control for Firms that Perform Audit and Reviews of Historical Financial
Information, and other Assurance and Related Services Engagements”.
 Announcement on Amendment to SQC 1 - Retention Period for Engagement
Documentation (Working Papers).
Audits and Reviews of Historical Financial Information
New/Revised Standards (Auditing, Review and Others) issued under the Clarity Project
 100-199 Introductory Matters
 200-299 General Principles and Responsibilities
 SA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing
 SA 210, Agreeing the Terms of Audit Engagements
 SA 220, Quality Control for an Audit of Financial Statements
 SA 230, Audit Documentation
 SA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements
 SA 250, Consideration of Laws and Regulations in an Audit of Financial Statements
 SA 260, Communication with Those Charged with Governance
 Revised SA 260, Communication with Those Charged with Governance
 SA 265, Communicating Deficiencies in Internal Control to Those Charged with
Governance and Management
 SA 299, Responsibility of Joint Auditors
 300-499 Risk Assessment and Response to Assessed Risks

 SA 300, Planning an Audit of Financial Statements
 SA 315, Identifying and Assessing the Risks of Material Misstatement Through
Understanding the Entity and Its Environment
 SA 320, Materiality in Planning and Performing an Audit
 SA 330, The Auditor’s Responses to Assessed Risks
 SA 402, Audit Considerations Relating to an Entity Using a Service Organisation
 SA 450, Evaluation of Misstatements Identified During the Audit
 500-599 Audit Evidence

 SA 500, Audit Evidence
 SA 501, Audit Evidence-Specific Considerations for Selected Items
 SA 505, External Confirmations
 SA 510, Initial Audit Engagements – Opening Balances
 SA 520, Analytical Procedures
 SA 530, Audit Sampling
 SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures
 SA 550, Related Parties
 SA 560, Subsequent Events
 SA 570, Going Concern
 Revised SA 570, Going Concern
 SA 580, Written Representations

F .II
 600-699 Using Work of Others

 SA 600, Using the Work of Another Auditor
 SA 610, Using the Work of Internal Auditors
 Revised SA 610, Using the Work of Internal Auditors
 SA 620, Using the Work of an Auditor’s Expert
 700-799 Audit Conclusions and Reporting

 SA 700, Forming an Opinion and Reporting on Financial Statements
 Revised SA 700, Forming an Opinion and Reporting on Financial Statements
 SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
 SA 705, Modifications to the Opinion in the Independent Auditor’s Report
 Revised SA 705, Modifications to the Opinion in the Independent Auditor’s Report
 SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report
 Revised SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report
 SA 710, Comparative Information—Corresponding Figures and Comparative Financial
Statements
 SA 720, The Auditor’s Responsibility in Relation to Other Information in Documents
Containing Audited Financial Statements
 800-899 Specialized Areas

 SA 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with
Special Purpose Frameworks
 SA 805, Special Considerations—Audits of Single Financial Statements and Specific Elements,
Accounts or Items of a Financial Statement
 SA 810 , Engagements to Report on Summary Financial Statements
 2000-2699 Standards on Review Engagements (SREs)

 SRE 2400 “Engagements to Review Financial Statements
 SRE 2400 (Revised), Engagements to Review Historical Financial Statements
 SRE 2410 “Review of Interim Financial Information Performed by the Independent Auditor
of the Entity”
Assurance Engagements Other Than Audits or Reviews of Historical Financial Information
 3000-3699 Standards on Assurance Engagements (SAEs)
 3000-3399 Applicable to All Assurance Engagements
 3400-3699 Subject Specific Standards
 SAE 3400 “The Examination of Prospective Financial Information”
 SAE 3402, “Assurance Reports on Controls At a Service Organisation”
 SAE 3420, Assurance Engagements to Report on the Compilation of Pro Forma Financial
Information Included in a Prospectus
Related Services
 4000-4699 Standards on Related Services (SRSs)
 SRS 4400 “Engagements to Perform Agreed-upon Procedures Regarding Financial
Information”
 SRS 4410 “Engagements to Compile Financial Information”
 SRS 4410 (Revised), Compilation Engagements
General Clarifications issued

 General Clarification (GC)-AASB/2/2004 on SA 210
 General Clarification (GC)-AASB/1/2002 on SA 620

G
BANK AUDIT (2017-18) - INTERNAL CONTROLS AND RISK BASED AUDIT APPROACH
Risks
Banks face varied risks in the conduct of their operations, and the key driver behind profitability depends
on how well these risks (inherent business risks and control risks), are understood, identified and
managed based on systems that need to be constantly evaluated.
These risks have also arisen due to extensive computerization that can capture voluminous data and
transactions as economic events take place and it is relevant to understand what the Regulator had done
in this regard.
RBI appointed various committees, as under:
a. Committee on Mechanisation in the The major recommendation of this committee was introducing MICR
Banking Industry (1984) under the Technology in all the banks in the metropolis in India. This provided use
Chairmanship of Dr. C. Rangarajan, of standardized cheque forms and encoders.
Deputy Governor, Reserve Bank of
India.
b. Committee on Computerisation in It emphasized that settlement operation must be computerized in the

Banks (1988) headed by Dr. C. clearing houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna and
Rangarajan Thiruvananthapuram .It further stated that there should be National
Clearing of inter-city cheques at Kolkata, Mumbai, Delhi, Chennai and
MICR should be made Operational. It also focused on computerisation
of branches and increasing connectivity among branches through
computers. It also suggested modalities for implementing on-line
banking. The committee submitted its reports in 1989 and
computerisation began form 1993 with the settlement between IBA and
bank employees' association
c. Committee on Technology Issues It emphasized on Electronic Funds Transfer (EFT) system, with the
relating to Payments System, BANKNET communications network as its carrier. It also said that
Cheque Clearing and Securities MICR clearing should be set up in all branches of all banks with more
Settlement in the Banking than 100 branches.
Industry (1994) with Shri WS Saraf,
Executive Director, Reserve Bank of
India as chairman.
d. Committee for proposing It emphasized on EFT system. Electronic banking refers to conduct of
Legislation on Electronic Funds banking by using technologies like computers, internet and networking,
Transfer and other Electronic MICR, EFT so as to increase efficiency, quick service, productivity and
Payments (1995) transparency in the transactions.
The main risks faced by banks include:

Credit Risk risk of loss arising from a borrower who does not make payments as promised
Liquidity Risk risk that a given security or asset cannot be traded quickly enough in the market to
prevent a loss (or make the required profit).
Market Risk risk that the value of a portfolio, either an investment portfolio or a trading portfolio,
will decrease due to the change in value of the market risk factors
Operational Risk risk arising from execution of business functions
Reputational related to the trustworthiness of business
Risk
Audit Risks In EDP environment

Lack of internal control Loss of audit trail
systems; Non - review of and inaction/non compliance of matters arising out
Inadequate internal controls; of exceptional reports (systems/ transactions)
and Lack/breach of security systems (hardware/ software) related to all
Breach of internal controls areas of operations

G
These require extensive control mechanism, which is the primary responsibility of the Management. It is
recognized that there are mainly four types of controls (deterrent, preventive, detective and
corrective). Reference may also be made to Section C III.
Heavy reliance is placed in banks on the existence of Internal controls, systems and procedures in all
areas of the business and operations and the key aspects; and with extensive computerization, to
instantly and in the shortest time frame, capture and record all economic events and transactions that
affect the financials of the banks.
The timing and extent of audit procedures is heavily dependent on the existence or otherwise of a robust
system of internal controls and strict compliance by the Management of such system. Based on the level
/gravity of the risk, the auditor will have to curtail or extend audit procedures. Additional responsibilities
cast on the auditors and the scope of their work getting extended in the areas of reporting on frauds,
fraudulent activities, foul play in banking transactions, require the auditor to specially look into the
systems and procedures laid down and the effectiveness of the controls exercised by Management.
Internal control evaluation assists the auditor to determine the effectiveness or otherwise of
the control systems and of the integrity of the information/data generated and its reliability for the
purpose of his examination and reporting thereon. If evaluation reveals weaknesses, it enables the
auditor to strengthen his audit procedures, and to lay appropriate emphasis on the risk prone areas. It
needs to be emphasized that transactions in banks are voluminous though repetitive, and fall into
limited categories/heads of account. It would , therefore, be appropriate that the evaluation of the
internal controls is made for each class/category of transactions.
The traditional audit procedures have given way to better techniques by moving towards risk
based auditing and qualitative reporting.
Internal controls include:
a) accounting controls, and
b) administrative controls.
Accounting controls cover areas directly concerned with recording of financial transactions and
maintenance of such registers / records as ensure their reliability. Broadly, these controls relate to
execution of transactions as are in conformity with:
a) legal requirements and those of the regulatory bodies,
b) generally accepted accounting principles and practices, and
c) general or specific authority and delegation of powers laid down by the management,
so that the financial statements and data are drawn up based on transactions as are authorised and
provide reasonable assurance as to reliability thereof, based on dual controls.
It should be understood that there is a distinction between accounting systems and internal accounting
controls. Accounting system envisages the processing of the transactions and events, their recognition
and appropriate recording. Internal controls are techniques, methods and procedures so designed and
usually built into systems, as would enable prevention as well as detection of errors, omissions or
irregularities in the process of execution and recording of transactions/events; particularly in the CBS
environment where the inputs at the branch also originate from other branches/offices of the
bank, due to access to the global records of the bank.
Administrative controls, broadly, are concerned with the decision processes and laying down of
authority / delegation of powers, by the management.
Internal Accounting Control Techniques involve prevention and detection of errors, omissions and
irregularities.
Prevention of errors, omissions and irregularities:

The internal accounting controls as would ensure prevention of errors, omissions and irregularities would
include the following:
a) No transaction can be recognized / recorded unless it is sanctioned/approved by the designated
authority.

G
b) Built-in dual control/supervisory procedures ensure that there is an independent automatic check on
inputs/vouchers, also providing built in checks on personnel identified to transactions as recorded
and to fix responsibility.
c) No single person has authority to initiate a transaction and record it through all stages to the
general ledger; and each day's transactions are promptly and accurately recorded, and the control
and subsidiary records are kept balanced through personnel independent of each other.
Detection of errors, omissions and irregularities:
Internal control techniques are useful as would enable detection of errors, omissions and irregularities,
and in Banks one would concentrate on the internal control mechanism and the system of monitoring,
supervision and control through various internal reporting systems, covering all aspects of business and
operations, including through Internal/concurrent audit/inspection/special audits/credit audit/System/IT
audit/stock audits, surprise checks etc.
The Auditor would be well advised to look into other areas as may lead to detection of
errors, omissions and irregularities, inter-alia the following:
i. Missing/loss of security paper stationery forms.
ii. Extensive use of and accumulation of transactions/balances in nominal heads of accounts like
Suspense, Sundries, Inter-branch accounts, or other nominal heads of accounts, particularly if
these accounts are frequently used to balance books, despite availability of information.
iii. Accumulation of old/large unexplained/unsubstantiated entries in accounts (as may also appear in
the periodic reconciliation statements), with other banks and institutions.
iv. Transactions represented by mere book adjustments not evidenced/ substantiated or upon non-
honouring of contracts /commitments (e.g. dishonour of Bankers' Receipt / SGL Forms in the
Investment Department).
v. Unexplained and old credits, capable of being misused. These could also arise by creation or
retention of credits, also represented by holding in physical custody, undispatched Deposit
Receipts of constituents, Banker’s cheques, Pay Orders and similar instruments (particularly not in
dual custody).
vi. Originating unauthorized debits in Head Office Accounts (inter-branch accounts).
vii. Results of periodic analytical reviews, if observed as adverse.
viii. Complaints/matters pending disposal in the Vigilance/Grievances Cell, as regards discrepancies
in accounts of constituents etc. and claims raised against the bank.
ix. Daily Exceptional reports in the EDP environment as regards systems and transactions and the
manner and timeliness of disposal thereof.
x. Delays in reporting critical transactions and events and in ratification procedures.
xi. Operations (credits) in advances being adversely disproportionate to the sanction, disbursements of
funds.
xii. Exceptional transactions and events and in particular those involving willful defaulters, non-
compliance of laid down guidelines e.g., on Money Laundering, ‘Know your Customer’ norms etc.
xiii. Lack of co-ordination procedures between administrative centralized offices having custody/control
over documentation and the branch where the borrower’s account is maintained and serviced.
xiv. Non reconciliation of NOSTRO (particularly large inflows/outflows related to trade credits) and
VOSTRO balances and accounts with other banks, balances in ATMs and agencies that handle
cash for ATM services on behalf of the Bank.
xv. Verification of contingent obligations with reference to evidence on record for guarantees, L/cs,
Letters of comfort/Undertaking (LoC/LOUs) and insistence on inter-bank confirmations for LOUs.
Risk Based Audit, which focuses on both recorded and unrecorded risks, is considered superior to a
traditional audit approach; and requires better understanding of the global and domestic banking
business environment and extensive knowledge of the Bank, its financial condition, sources of revenues,
expenditure, competition and its exposure to business risks which can be the underlying causes of
financial surprises, not restricted merely to the accounting records.
Risk Based Audit shifts the focus from inspecting the quality of the financial information in the financial
statements to building quality into the financial reporting process and improves financial statement
assurance and the financial statement reporting process. It adds value to the Bank's operations, by
identifying known and emerging risks and by an evaluation of the risk management systems and control
procedures prevailing in various areas of a bank’s operations.

G
Assessment of risks will include both the inherent business risks and control risks. Audit time and client
controls have a direct nexus to the degree of risks.
With the dynamism in the banking business, the related risks, including potential risks cannot be left
unaddressed. It is imperative to assess if, and when, a Bank has failed to identify/consider any important
risk that may not yet be well understood or managed in relation to the economic events or transactions
and covering the ever expanding variety of innovative products and services and their variants that banks
have added, and keep adding, to their operations.
Risk Based Audit approach tests and relies upon the Bank's process for controlling risks that could affect
the financial statements. In traditional audits, the auditor substantiates account balances after the fact
rather than relying on the Bank's controls. The auditor evaluates, and based on his assessment of the
effectiveness of the internal control system, extends or curtails his audit procedures.
The terms Risk based vs Risk focused Audit, are used interchangeably, but there is a slight difference.
Risk based approach helps in identifying where the risks lie and after which the focus can be on high and
medium risks to carry out the actual audit work. Hence risk based approach precedes a risk focused
audit approach.
Inherent business risks indicate the intrinsic risk in a particular area/activity of the bank and could be
grouped into low, medium and high categories depending on the severity of the risk.
Control risks arise out of inadequate control systems, deficiencies/ gaps and / or likely failure in the
existing control processes. The control risks could also be classified into low, medium and high
categories.
Based on the requisite information and appropriate data inputs from the bank the auditor should
generate and categorise the risks for each business activity/ location and prepare a risk matrix based on
overall risk assessment of both the inherent and control risks, as under:
Categorisation of the overall risk assessment

High risk Very high risk Extremely high Medium risk Low risk
risk
inherent risk - the inherent risk- inherent risk - inherent risk - Inherent risk - low.
high high control risk - medium control risk -low
control risk - low, control risk - both high control risk –
medium low
inherent risk - inherent risk - inherent risk -

medium, medium low
control risk - control risk -.high control risk -
medium medium.
inherent risk -
low,
control risk - high
Based on the above, the audit plan should prioritize audit work to give greater attention to the areas of:
i. High magnitude and high frequency (besides ongoing monitoring this would require immediate
audit attention with maximum allocation of audit resources).
ii. High magnitude and medium frequency
iii. Medium magnitude and high magnitude
iv. High magnitude and low frequency
v. Medium magnitude and low frequency

H
BASIC ANALYTICAL PROCEDURES/REVIEWS
Financial and performance ratios should be considered useful in connection with any audit to get a
broader picture of the state of affairs and of the operating results; and banks can be no exception to this.
A broad comparison of the figures, at least of the major components in the financial statements of the
current year with those of the previous year should be made, to determine and enquire into any
disproportionate increase/decrease that may require in depth examination of the related heads; in
particular as to the composition of the advances classified as Standard, Sub Standard, Doubtful or Loss
assets as well as the impact on the movements in provisions related thereto. Analysis also needs to be
made of the propensity of upward/downward movements in income not realised on the NPAs to determine
the potential loss of revenue, which can also be gauged independently on a year-wise comparison of the
aggregate of income contractually due but not earned, e.g., unapplied interest, interest suspense,
commission, charges (in relation to NPAs) and right of recompense in relation to advances
upgraded, particularly the restructured advances carrying such stipulation.
An overview must be made as regards the number and amount of advances that have been subjected to
restructuring, rehabilitation, nursing or rescheduling, resulting in WCTL, FITL, as such amounts represent
those arising in default of servicing of the debts.
Attention must be focused on any divergent trends between revenue/expenditure and related assets or
liabilities.
For banks the ratios could be categorised into those relating to:
a) ASSET QUALITY
b) LIQUIDITY
c) EARNINGS
a) ASSET QUALITY RATIOS

-Loan Losses to Total Advances
-NPAs to Total Advances
-Net Profit to Loan Losses
-Doubtful Advances to Gross Income
-Permanent/Current Investments to Total Investments
-Market value to cost of:
.Permanent Investments
.Current Investments
b) LIQUIDITY RATIOS
-Cash and liquid securities (e.g. those due within 30 days) to total assets
-Inter-bank and money market deposit liabilities to total assets
c) EARNINGS RATIOS
-Return on: average total assets
average total equity
-Interest on: advances as a percentage of Average Advances
Deposits as a percentage of Average Deposits
-Income/yield on Average Investments and return of Treasury Functions.
-Average interest earned on advances to average interest expended on Deposits and borrowings
(Average cost of borrowing vis-a-vis average yield on moneys applied)
-Ratio of unapplied interest income/income suspense to Advances.
d) PRIMA FACIE INCONSISTENCIES AND OTHER MATTERS

 Standard Assets having Interest Suspense or Unapplied Interest (except in Central Govt.
guaranteed accounts)
 Interest Provision/ accretion on Non Performing Assets
 Status of the same borrower – cum- investee being at variance
 Regular invoking of Guarantees in Standard Advances
 Sudden/unusual increase in Deposits/Advances that get reversed in the immediate or near future
 Sharp increase/decrease in contingent liabilities and off balance sheet exposures.

BANK AUDIT (2017-18) I
RESERVE BANK OF INDIA – RELEVANT MASTER DIRECTIONS (Upto February 12, 2018)
Circular Number Date of Issue Subject
Master Direction - Know Your Customer (KYC)
DBR.AML.BC.No.81/14.01.001/2015-16 25.02.2016
Direction, 2016
Master Direction - Reserve Bank of India (Interest
DBR. Dir. No.84/13.03.00/2015-16 03.03.2016
Rate on Deposits) Directions, 2016
Master Direction - Reserve Bank of India (Interest
DBR.Dir.No.85/13.03.00/2015-16 03.03.2016
Rate on Advances) Directions, 2016
Master Directions on Frauds – Classification and
DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 01.07.2016
Reporting by commercial banks and select FIs
Master Direction - Priority Sector Lending – Targets
FIDD.CO.Plan.1/04.09.01/2016-17 07.07.2016
and Classification
Master Direction - Reserve Bank of India (Relief
FIDD.CO.FSD.BC No.8/05.10.001/2017-18 03.07.2017 Measures by Banks in Areas Affected by Natural
Calamities) Directions, 2016
Master Direction - Lending to Micro, Small & Medium
FIDD.MSME & NFS.12/06.02.31/2017-18 24.07.2017
Enterprises (MSME) Sector
TO THE EXTENT NOT REPEALED/OVERRIDDEN,THE FOLLOWING ARE THE MASTER CIRCULARS
RESERVE BANK OF INDIA – MASTER CIRCULARS ISSUED ON 1-7-2015

Circular No. Subject
DBR.No.BP.BC.2/21.04.048/2015-16 Prudential norms on Income Recognition, Asset Classification and
Provisioning pertaining to Advances.
DBR.No.CID.BC.22/20.16.003/2015-16 Master Circular on Wilful Defaulters.
DBR.BP.BC No.23/21.04.018/2015-16 Disclosure in Financial Statements - ‘Notes to Accounts’.
DBR.No.Ret.BC.24/12.01.001/2015-16 Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
DBR No BP.BC.6/21.04.141/2015-16 Prudential Norms for Classification, Valuation and Operation of
Investment Portfolio by Banks.
DBR.No.Dir.BC.10/13.03.00/2015-16 Loans and Advances – Statutory and Other Restrictions.
DBR.No.BP.BC.4./21.06.001/2015-16 Prudential Guidelines on Capital Adequacy and Market Discipline-New
Capital Adequacy Framework (NCAF).
DBR. No. Dir. BC.11/13.03.00/2015-16 Guarantees and Co-acceptances.
DBR.No.Dir.BC.12/13.03.00/2015-16 Exposure Norms.
DBR.No.Dir.BC.7/13.03.00/2015-16 Master Circular on Interest Rates on Rupee Deposits held in Domestic, Ordinary
Non-Resident (NRO) and Non-Resident (External) (NRE) Accounts.
DBR No.Leg.BC. 21/09.07.006/2015-16 Master Circular on Customer Service in Banks.
DBR.No.BP.BC.1/21.06.201/2015-16 Basel III Capital Regulations.
DBR No.DIR.BC.14/04.02.002/2015-16 Rupee / Foreign Currency Export Credit and Customer Service To
Exporters.
DBR.No.DIR.BC.13/08.12.001/2015-16 Housing Finance.
DBR.AML.BC.No.15/14.01.001/2015-16 Know Your Customer (KYC) norms / Anti-Money Laundering (AML)
standards/Combating Financing of Terrorism (CFT)/Obligation of banks and
financial institutions under PMLA, 2002.
Master Circular on Interest Rates on Deposits held in FCNR (B) Accounts.
DBR.No.Dir.BC.8/13.03.00/2015-16
DBR.No.Dir.BC.9/13.03.00/2015-16 Interest Rates on Advances.
DBR.BP.BC.No.5/21.04.172/2015-16 Bank Finance to Non-Banking Financial Companies (NBFCs).
DBR.AML.BC.No.16/14.08.001/ 2015-16 Guidelines issued under Section 36(1)(a) of the Banking Regulation Act,
1949 - Implementation of the provisions of Foreign Contribution (Regulation)
Act, 2010.
DBR.No.FSD.BC.19/24.01.001/2015-16 Para-banking Activities
FIDD.MSME & NFS.BC.No.07/06.02.31/2015-16 Lending to Micro, Small & Medium Enterprises (MSME) Sector
FIDD.No.FSD.BC.01/05.10.001/2015-16 GUIDELINES FOR RELIEF MEASURES BY BANKS IN AREAS
AFFECTED BY NATURAL CALAMITIES
FIDD.GSSD.BC.No.05/09.10.01/2015-16 Credit Facilities to Minority Communities
Bnkad18 Sanjay v & .mmk 1

TO THE EXTENT NOT REPEALED/OVERRIDDEN,THE FOLLOWING ARE THE MASTER CIRCULARS
RESERVE BANK OF INDIA – MASTER CIRCULARS ISSUED ON 1-7-2015
Circular No. Subject
FIDD.CO.GSSD.BC.No 06/09.09.01/2015-16 Credit facilities to Scheduled Castes (SCs) & Scheduled Tribes (STs)
FIDD.CO.Plan.BC.4/04.09.01/2015-16 PRIORITY SECTOR LENDING - TARGETS
AND CLASSIFICATION
FIDD.CO.LBS.BC.No.3/02.01.001/2015-16 Lead Bank Scheme
FIDD.FID.BC.No.02/12.01.033/2015-16 Master Circular on SHG-Bank Linkage Programme
FMRD.DIRD. 01 /14.01.001/2015-16 Master Circular on Call/Notice Money Market Operations
DCM (FNVD) G- 4/16.01.05/2015-16 Detection and Impounding of Counterfeit Notes
DCM(CC) No. G - 1/03.35.01/2015-16 Levy of Penal Interest for Delayed Reporting/Wrong Reporting/Non-
Reporting of Currency Chest Transactions and Inclusion of Ineligible
Amounts in Currency Chest Balances
DBR.No.FSD.BC.18/24.01.009/2015-16 Credit Card, Debit Card and Rupee Denominated Co-branded Pre-paid
Card Operations of Banks and Credit Card issuing NBFCs
DBR.No.BP.BC.3/21.01.002/2015-16 Prudential Norms on Capital Adequacy - Basel I Framework
DCM (NE) No. G - 2/08.07.18/2015-16 Facility for Exchange of Notes and Coins
DPSS.CO.PD. MobileBanking.No.1/02.23.001/2015-16 Mobile Banking transactions in India – Operative Guidelines for Banks
DGBA.GAD.No.3/42.01.034/2015-16 Collection of Direct Taxes- OLTAS
DGBA.GAD.No.2/31.12.010/2015-16 Master Circular on Conduct of Government Business by Agency Banks -
Payment of Agency Commission
DGBA.GAD.No.H-1/31.05.001/2015-16 Disbursement of Government Pension by Agency Banks
IDMD.CDD.No.5984/13.01.299/2015-16 Master Circular on Appointment and Delisting of Brokers, and Payment of
Brokerage on Relief/Savings Bonds
IDMD.CDD. No.5983 /13.01.299/2015-16 Master Circular on Nomination facility for Relief/Savings bonds
OTHER CIRCULARS
DBR.No.BP.BC. 37 & 49/21.04.048/2016-17 dated Master Circular on Prudential Norms on Income Recognition, Asset
21.11.2016 & 28.12.2016 Classification and Provisioning pertaining to Advances
RESERVE BANK OF INDIA – OTHER RELEVANT CIRCULARS (Upto February 12, 2018)

DBOD.NO.BP.BC.60 / 21.04.048/2005-06 01.02.2006 Guidelines on securitization of Standard Assets
Financing of Infrastructure - Definition of 'Infrastructure
DBOD.BP.BC.No.66 / 08.12.014 / 2013-14 25-11-2013
Lending'
DBOD.No.BP.BC. 85 /21.06.200/2013-14 15.01.2014 Capital and Provisioning Requirements for Exposures to
DBOD.No.BP.BC.116/21.06.200/2013-14 03.06.2014 entities with Unhedged Foreign Currency Exposure
Master Circular - Lending to Micro, Small & Medium
RPCD.MSME & NFS.BC.No. 3/06.02.31/2014-15 01.07.2014
Enterprises (MSME) Sector
Master Circular - Loans and Advances – Statutory and
DBOD.No.Dir.BC.14/13.03.00/2014-15 01.07.2014
Other Restrictions
Guidelines for Relief Measures by Banks in Areas Affected
FIDD.No.FSD.BC.52/05.10.001/2014-15 25.03.2015
by Natural Calamities
FIDD.CO.Plan.BC.54/04.09.01/2014-15 23.04.2015 Priority Sector Lending-Targets and Classification
Bucketing of excess SLR and MSF securities in Structural
DBR.No.BP.BC.26/21.04.098/2015-16 02.07.2015
Liquidity Statement.
DBR.No.BP.BC.27/21.04.048/2015-16 Discount Rate for Computing Present Value of Future
02.07.2015
Cash Flows.
Opening of Current Accounts by Banks - Need for
DBR.Leg.BC.25./09.07.005/2015-16 02.07.2015
Discipline.
Data Format for Furnishing of Credit Information to
DBR.No.CID.BC.28 /20.16.056/2015-16 09.07.2015 Credit Information Companies and other Regulatory
Measures.
Prudential Norms on Income Recognition, Asset
DBR.No.BP.BC.30/21.04.048/2015-16 16.07.2015 Classification and Provisioning pertaining to Advances
– Credit Card Accounts.
Deposits placed with NABARD/SIDBI/NHB for meeting
DBR.BP.BC.No.31/21.04.018/2015-16 16.07.2015 shortfall in Priority Sector Lending by Banks-Reporting in
Balance Sheet.
Concurrent Audit System in Commercial Banks -
DBS.CO.ARS.No. BC. 2/08.91.021/2015-16 16.07.2015
Revision of RBI's Guidelines.
DBR.No.FSD.BC.32/24.01.007/2015-16 30.07.2015 Provision of Factoring Services by Banks – Review.

Anti-Money Laundering (AML)/ Combating of Financing of
DBR.AML.No.1637/14.01.001/2015-16 30.07.2015
Terrorism (CFT) – Standards.
Interest Rates on Deposits – Deposits of Army Group
DBR.Dir.BC.No.33/13.03.00/2015-16 06.08.2015 Insurance Directorate (AGID), Naval Group Insurance Fund
(NGIF) and Air Force Group Insurance Society (AFGIS).
FIDD.No.FSD.BC.59/05.04.02/2015-16 13.08.2015 Union Budget - 2015-16 Interest Subvention Scheme.
Guidelines for Relief Measures by Banks in Areas
FIDD No. FSD.BC.12/05.10.001/2015-16 21.08.2015
affected by Natural Calamities.
Streamlining flow of credit to Micro and Small Enterprises
FIDD.MSME & NFS.BC.No.60/06.02.31/2015-16
27.08.2015 (MSEs) for facilitating timely and adequate credit flow
during their ‘Life Cycle’.
DCM (FNVD) No. 776/16.01.05/2015-16 27.08.2015 Detection of Counterfeit Notes.
Security and Risk Mitigation Measures for Card Present and
DPSS.CO.PD.No.448/02.14.003/2015-16 27.08.2015 Electronic Payment Transactions – Issuance of EMV Chip
and PIN Cards.
Reporting requirement under Foreign Account Tax
IDMD/416/08.02.032/2015-16 28.08.2015 Compliance Act (FATCA) and Common Reporting
Standards (CRS).
DBR.AML.No. 3074/14.01.001/2015-16 31.08.2015 Compliance Act (FATCA) and Common Reporting
Standards (CRS) – Guidance Note.
Guidelines on Compensation of Chief Executive Officer/
DBR.Dir.BC.No.38/13.03.00/2015-16 16.9.2015 Whole Time Directors – Restrictions under Section 20 of the
Banking Regulation Act, 1949 – Loans to Directors.
DBS.ARS.BC 4/08.91.020/2015-16 24.09.2015 Constitution of the Audit Committee of the Board.
Framework for Revitalising Distressed Assets in the
* DBR.BP.BC.No.39/21.04.132/2015-16 24.09.2015 Economy – Review of the Guidelines on Joint Lenders’
Forum (JLF) and Corrective Action Plan (CAP).
Prudential Norms on Change in Ownership of
* DBR.BP.BC.No.41/21.04.048/2015-16 24.09.2015 Borrowing Entities (Outside Strategic Debt
Restructuring Scheme).
Foreign Exchange Management (Regularization of assets
Notification No. FEMA. 348/2015-RB 25.09.2015 held abroad by a person resident in India) Regulations,
2015.
Liquidity Adjustment Facility – Repo and Reverse Repo
FMOD.MAOG. No. 110/01.01.001/2015-16 29.09.2015
Rate.
Individual Housing Loans: Rationalisation of Risk-Weights
DBR.BP.BC.No. 44/08.12.015/2015-16 08.10.2015
and LTV Ratios.
DPSS. CO. AD. No. 745/02.27.005/2015-16 15.10.2015 Compliance Act (FATCA) and Common Reporting
Standards (CRS).
DBR.IBD.No.45/23.67.003/2015-16 22.10.2015 Gold Monetisation Scheme, 2015.
Amendment to Prevention of Money Laundering
(Maintenance of Records) Rules, 2005 – Submitting
DBR. AML.BC. No. 46/14.01.001/2015-16 29.10.2015
‘Officially Valid Documents’ - Change in name on account of
marriage or otherwise.
DBR.IBD.BC.53/23.67.003/2015-16 03.11.2015 Gold Monetisation Scheme, 2015 - Interest Rate.
DBR.IBD.BC.52/23.67.003/2015-16 03.11.2015 Gold Monetisation Scheme, 2015 – Amendment
FIDD.CO.Plan.BC. 13/04.09.01/2015-16 19.11.2015 Priority Sector Lending – Targets and Classification
DBR.BP.BC.No.55/21.04.172/2015-16 26.11.2015 Bank Finance to Factoring Companies
Central KYC Records Registry (CKYCR) - template for Know Your
Customer (KYC) and reporting requirements under Foreign
DBR.AML.BC.No.60/14.01.001/2015-16 26.11.2015 Account Tax Compliance Act (FATCA)/ Common Reporting
Standards (CRS)
Interest Equalisation Scheme on Pre and Post
DBR.Dir.BC.No.62/04.02.001/2015-16 04.12.2015
Shipment Rupee Export Credit.
DBR.No.Dir.BC.67/13.03.00/2015-16 17.12.2015 Interest Rates on Advances
Extension of Credit Facilities to Overseas Step-down
DBR.IBD.BC.No.68/23.37.001/2015-16 31.12.2015
Subsidiaries of Indian Corporates
DBR.Dir.BC.No.70/13.03.00/2015-16 Non-Fund Based Facility to Non-constituent Borrowers
07.01.2016
of Bank

Master Circular – Basel III Capital Regulations –
DBR.No.BP.BC.71/21.06.201/2015-16 14.01.2016
Clarification
Direct Benefit Transfer (DBT) Scheme – Seeding of
FIDD.CO.LBS.BC. No.17/02.01.001/2015-16 14.01.2016
Aadhaar in Bank Accounts – Clarification
DBR.IBD.BC.74/23.67.001/2015-16 21.1.2016 Amended circular on Gold Monetisation Scheme, 2015
DBS.CO.PPD.BC.No.10/11.01.005/2015-16 28.4.2016 Compliance with Jilani Committee Recommendations
DBS.CO/CSITE/BC.11/33.01.001/2015-16 02.6.2016 Cyber Security Framework in Banks
National Rural livelihoods Mission (NRLM) – Aajeevika -
FIDD.GSSD.CO.BC.No.26/09.01.03/2015-16 09.6.2016
Interest Subvention Scheme
* DBR.No.BP.BC.103/21.04.132/2015-16 13.6.2016 Scheme for Sustainable Structuring of Stressed Assets
Prudential Norms on Income Recognition, Asset
DBR.No.BP.BC.102/21.04.048/2015-16 13.6.2016 Classification and Provisioning pertaining to Advances –
Spread Over of Shortfall on Sale of NPAs to SCs/RCs
DBR.BP.BC.No.106/21.07.001/2015-16 23.6.2016 Implementation of Indian Accounting Standards (Ind AS)
Guidelines for relief measures by banks in areas
FIDD.No.FSD.BC.27/05.10.001/2015-16 30.6.2016 affected by natural calamities-utilisation of insurance
proceeds
FIDD.CO.LBS.BC.No.5/02.01.001/2016-17 07.7.2016 Master Circular - Lead Bank Scheme
FIDD.FID.BC.No.06/12.01.033/2016-17 07.7.2016 Master Circular on SHG-Bank Linkage Programme
FIDD.GSSD.BC.No.01/09.10.01/2016-17
07.7.2016 Master Circular- Credit Facilities to Minority Communities
(Updated as on September 29, 2016)
Master Circular - Credit facilities to Scheduled Castes (SCs)
FIDD.CO.GSSD.BC.No.03/09.09.01/2016-17 07.7.2016
& Scheduled Tribes (STs)
Master Circular – Deendayal Antyodaya Yojana - National
FIDD.GSSD.CO.BC.No.07/09.01.01/2016-17 07.7.2016
Rural Livelihoods Mission (DAY-NRLM)
Master Circular - Deendayal Antyodaya Yojana- National
FIDD.GSSD.CO.BC.No.04/09.16.03/2016-17 07.7.2016 Urban Livelihoods Mission (DAY-NULM)
DCM (NE) No.120/08.07.18/2016-17 14.7.2016 Facility for Exchange of Soiled/ Mutilated/ Imperfect Notes
Master Circular – Policy Guidelines on Issuance and
DPSS.CO.PD.PPI.No.01/02.14.006/2016-17 14.7.2016
Operation of Pre-paid Payment Instruments in India
DPSS.CO.PD.Mobile Banking.No./2/02.23.001/2016- Master Circular – Mobile Banking transactions in India –
14.7.2016
2017 Operative Guidelines for Banks
DCM (NE) No.G-1/08.07.18/2016-17 18.7.2016 Master Circular – Facility for Exchange of Notes and Coins
Master Circular –Scheme of Penalties for bank branches
DCM (CC) No.G-3/03.44.01/2016 – 17 20.7.2016 based on performance in rendering customer service to the
members of public
DBR.No.Leg.BC.3/09.07.005/2016-17 04.8.2016 Dishonour of cheques – Modification in procedure
FIDD.CO.Plan.BC.10/04.09.01/2016-17 11.8.2016 Priority Sector Lending status for Factoring Transactions
Pradhan Mantri Fasal Bima Yojna-Non-feeding of data by
FIDD.CO.FSD.BC.11/05.10.007/2016-17 25.8.2016
bank branches in the Crop Insurance Portal of MoA&FW
Deendayal Antyodaya Yojana - National Rural Livelihoods
FIDD.GSSD.CO.BC.No.13/09.01.03/2016-17
25.8.2016 Mission (DAY-NRLM) – Aajeevika - Interest Subvention
Scheme
Prudential Norms for Off-balance Sheet Exposures of
DBR.No.BP.BC.7/21.04.157/2016-17 25.8.2016
Banks – Restructuring of derivative contracts
DBS.CO.PPD.05/11.01.005/2016-17 25.8.2016 Risk- based Internal Audit
DBR.No.BP.BC.9/21.04.048/2016-17 01.9.2016 Guidelines on Sale of Stressed Assets by Banks
Master Circular- Credit Facilities to Minority Communities –
FIDD.GSSD.BC.No.15/09.10.01/2016-17 29.9.2016
Modification
DBR.CID. BC. No.17/20.16.003/2016-17 29.9.2016 Publishing of photographs of Wilful defaulters
DBR.No.BP.BC.34/21.04.132/2016-17 10.11.2016 Schemes for Stressed Assets - Revisions
DBR.No.BP.BC.43/21.01.003/2016-17 01.12.2016 Large Exposure Framework
Financing of Infrastructure – ‘Definition of 'Infrastructure
DBR.BP.BC.No.42/08.12.014/2016-17 01.12.2016
Lending'
DBR.AML.BC. No.18/14.01.001/2016-17 08.12.2016 Amendment to Master Direction (MD) on KYC
Amendment to Master Direction on Know Your Customer
DBR.AML.BC.47/14.01.01/2016-17 08.12.2016
Compliance to provisions of Master Direction on Know Your
DBR.AML.BC.48/14.01.01/2016-17 15.12.2016
Customer (KYC)

Scheme for Sustainable Structuring of Stressed Assets
* DBR.No.BP.BC.33/21.04.132/2016-17 10.11.2016
– Revisions
* DBR.No.BP.BC.34/21.04.132/2016-17 10.11.2016 Scheme for Stressed Assets – Revisions
DGBA.GAD.No.2294/15.04.001/2016-17 06.03.2017 Gold Monetisation Scheme
DBR.No.Ret.BC.58/12.01.001/2016-17 06.04.2017 Change in Bank Rate
Revised Prompt Corrective Action (PCA) Framework for
DBS.CO.PPD.BC.No.8/11.01.005/2016-17 13.04.2017
Banks
Grant of ‘Certificate of Registration’ – For carrying on the
DBR.CID.BC. 60/20.16.040/2016-17 13.04.2017
business of credit information – Transunion CIBIL Limited
Guidelines on compliance with Accounting Standard (AS)
DBR.BP.BC.No.61/21.04.018/2016-17 18.04.2017 11 [The Effects of Changes in Foreign Exchange Rates] by
banks – Clarification
Additional Provisions For Standard Advances At Higher
DBR.No.BP.BC.64/21.04.048/2016-17 18.04.2017
Than The Prescribed Rates
Disclosure in the “Notes to Accounts” to the Financial
DBR.BP.BC.No.63/21.04.018/2016-17 18.04.2017 Statements- Divergence in the asset classification and
provisioning
DBS.CO.PPD.BC.No.9/11.01.005/2016-17 20.04.2017 Compliance with Ghosh Committee Recommendations
Risk Management Systems – Role of the Chief Risk Officer
DBR.BP.BC.No.65/21.04.103/2016-17 27.04.2017
(CRO)
* DBR.BP.BC.No.67/21.04.048/2016-17 05.05.2017 Timelines for Stressed Assets Resolution
DBR.Appt.No.BC.68/29.67.001/2016-17 18.05.2017 Minimum qualifications and experience for CFO and CTO
DBR.No.BP.BC.70/21.04.142/2016-17 18.05.2017 Partial Credit Enhancement to Corporate Bonds
Rationalisation of Branch Authorisation Policy- Revision of
DBR.No.BAPD.BC.69/22.01.001/2016-17 18.05.2017
Guidelines
Continuation of Interest Subvention Scheme for short-term
FIDD.CO.FSD.BC.No.29/05.02.001/2016-17 25.05.2017 crop loans on interim basis during the year 2017-18-
regarding
Individual Housing Loans: Rationalisation of Risk-Weights
DBR.BP.BC.No.72/08.12.015/2016-17 07.06.2017
and Loan to Value (LTV) Ratios
Section 24 and Section 56 of the Banking Regulation Act,
DBR.No.Ret.BC.71/12.02.001/2016-17 07.06.2017
1949 - Maintenance of Statutory Liquidity Ratio (SLR)
Prudential Guidelines on Capital Adequacy and Market
Discipline- New Capital Adequacy Framework (NCAF) -
DBR.No.BP.BC.74/21.06.009/2016-17 13.06.2017
Eligible Credit Rating Agencies – INFOMERICS Valuation
and Rating Pvt Ltd. (INFOMERICS)
Recording of Details of Transactions in Passbook/
DBR.No.Leg.BC.76/09.07.005/2016-17 22.06.2017
Statement of Account
Limits on balances in customer accounts with payments
DBR.NBD.No.77/16.13.218/2016-17 29.06.2017
banks – sweep out arrangements with other banks
Master Circular on Conduct of Government Business by
DGBA.GBD.No.2/31.12.010/2017-18 01.07.2017
Agency Banks - Payment of Agency Commission
Master Circular – Deendayal Antyodaya Yojana – National
FIDD.GSSD.CO.BC.No.03/09.16.03/2017-18 01.07.2017
Urban Livelihoods Mission (DAY-NULM)
Master Circular – Deendayal Antyodaya Yojana – National
FIDD.GSSD.CO.BC.No.04/09.16.03/2017-18 01.07.2017
Urban Livelihoods Mission (DAY-NULM)
FIDD.GSSD.BC.No.05/09.10.01/2017-18 01.07.2017 Master Circular- Credit Facilities to Minority Communities
Master Circular - Credit facilities to Scheduled Castes (SCs)
FIDD.CO.GSSD.BC.No.06/09.09.001/2017-18 01.07.2017
& Scheduled Tribes (STs)
DCM(NE)No.G - 1/08.07.18/2017-18 03.07.2017 Master Circular – Facility for Exchange of Notes and Coins
FIDD.CO.FSD.BC.No.7/05.05.010/2017-18 03.07.2017 Master Circular - Kisan Credit Card (KCC) Scheme
FIDD.CO.LBS.BC.No.1/02.01.001/2017-18 03.07.2017 Master Circular – Lead Bank Scheme
FIDD.FID.BC.No.02/12.01.033/2017-18 03.07.2017 Master Circular on SHG-Bank Linkage Programme
Customer Protection – Limiting Liability of Customers in
DBR.No.Leg.BC.78/09.07.005/2017-18 06.07.2017
Unauthorised Electronic Banking Transactions
Audit Committee of the Board of Directors – Nomination of
DBS.ARS.BC.01/08.91.020/2017-18 13.07.2017
Non-Executive Chairman
Master Circular – Detection and Impounding of Counterfeit
DCM (FNVD) G – 4/16.01.05/2017-18 20.07.2017
Notes
Appointment of Statutory Central Auditors (SCAs) –
DBS.ARS.BC.04/08.91.001/2017-18 21.07.2017
modification of rest period

DBR.No.Ret.BC.82/12.01.001/2017-18 02.08.2017 Change in Bank Rate
DBR.CID.BC.No.79/20.16.042/2017-18 02.08.2017 Issue of comprehensive Credit Information Reports
Basel III Framework on Liquidity Standards – Liquidity
DBR.BP.BC.No. 81/21.04.098/2017-18 02.08.2017 Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and
LCR Disclosure Standard
Exclusion of the name of State Bank of Bikaner and Jaipur,
State Bank of Hyderabad, State Bank of Mysore, State
DBR.No.Ret.BC.82/12.01.001/2017-18 03.08.2017 Bank of Patiala, State Bank of Travancore and Bharatiya
Mahila Bank from the Second Schedule to the Reserve
Bank of India Act, 1934
Priority Sector Lending - Targets and Classification:
FIDD.CO.Plan.BC 16/04.09.01/2017-18 21.09.2017 Lending to non-corporate farmers – System wide average
of last three years
Amendments to Master Direction- Reserve Bank of India
DBR.No.FSD.BC.89/24.01.040/2017-18 25.09.2017
(Financial Services provided by Banks) Directions, 2016
Section 24 and Section 56 of the Banking Regulation Act,
DBR.No.Ret.BC.90/12.02.001/2017-18 04.10.2017 1949 – Maintenance of SLR and holdings of SLR in HTM
category
DGBA.GBD.954/15.02.005/2017-18 12.10.2017 Interest rates for Small Savings Schemes
Master Circular –Scheme of Penalties for bank branches
DCM (CC) No.G-3/03.44.01/2017-18 12.10.2017 based on performance in rendering customer service to the
members of public
DGBA.GBD.No.1007/15.04.001/2017-18 17.10.2017 Gold Monetisation Scheme, 2015
Introduction of Legal Entity Identifier for large corporate
DBR.No.BP.BC.92/21.04.048/2017-18 02.11.2017
borrowers
Statement on Developmental and Regulatory Policies -
DBR.No.Leg.BC.96/09.07.005/2017-18 09.11.2017 October 4, 2017- Banking Facility for Senior Citizens and
Differently abled Persons
Implementation of UNSCR 2356 (2017), UNSCR
DBR.AML.No.4802/14.06.056/2017-18 16.11.2017 2371(2017) and UNSCR 2375 (2017) pertaining to
Democratic People's Republic of Korea (DPRK)
DGBA.GBD.No.1324/31.02.007/2017-18 16.11.2017 Agency Commission for GST receipt transactions
Settlement of Agency transactions in certain cases (for
DGBA.GBD.No-1498/31.02.007/2017-18 07.12.2017 Funds and Agency Commission) directly from Reserve
Bank of India
DBR.No.Leg.BC.98/09.08.019/2017-18 19.12.2017 Submission of Financial Information to Information Utilities
DBR.No.BP.BC.99/08.13.100/2017-18 04.01.2018 XBRL Returns – Harmonization of Banking Statistics
Relief for MSME Borrowers registered under Goods and
DBR.No.BP.BC.100/21.04.048/2017-18 07.02.2018
Services Tax (GST)
Resolution of Stressed Assets – Revised
DBR.No.BP.BC.101/21.04.048/2017-18 12.02.2018
Framework
*Repealed vide Circular dated 12.02.2018

BANK AUDIT 2017-18 J
Frauds – Classification and Reporting by Banks
Reporting of frauds as per the Standards on Auditing (SA) issued by the Institute of
Chartered Accountants of India (ICAI),
Attention is drawn to the Auditing, Review and Other Standards (formerly known as AAS)
issued by the Institute of Chartered Accountants of India (ICAI).
Audit engagements, require compliance with the mandatory Standards on Auditing (SA)
issued by ICAI, which Standards are based on the corresponding International Standards on
Auditing.
The responsibilities and procedures of the auditor with regard to frauds and their reporting
are adequately described in the SA 240- Auditor’s Responsibilities relating to Frauds,
effective for audits of financial statements for periods beginning on or after 1st April, 2009;
and it expands on how SA 315, “Identifying and Assessing the Risks of Material
Misstatement Through Understanding the Entity and Its Environment,” and SA 330, “The
Auditor’s Responses to Assessed Risks,” are to be applied in relation to risks of material
misstatement due to fraud.
The objectives of the auditor, as per the SA are, to identify and assess the risks of material
misstatement in the financial statements due to fraud, to obtain sufficient appropriate audit
evidence about such assessed risks through designing and implementing appropriate
responses and to respond appropriately to identified or suspected fraud.
Misstatements in the financial statements can be caused by fraud or error, depending on the
related underlying action being intentional or unintentional.
The auditor is concerned with misstatements resulting from:
a. fraudulent financial reporting, and
b. misappropriation of assets.
By definition as per the SA, Fraud is “an intentional act by one or more individuals among
management, those charged with governance, employees, or third parties, involving the use
of deception to obtain an unjust or illegal advantage”. The auditor needs to keep in view the
fraud risk factors - events or conditions that indicate an incentive or pressure to commit
fraud or provide an opportunity to commit fraud.
Notwithstanding the auditors belief that Management and those charged with governance
are honest and have integrity, SA 315 requires the making of enquiries and performance of
certain risk assessment procedures to obtain information for use in identifying the risks of
misstatements due to fraud and a discussion among the engagement team members with
emphasis on how and where the entity’s financial statements may be susceptible to material
misstatement due to fraud, including how fraud might occur.
The auditor needs to enquire as to whether the Management has a laid down, and
determine the effectiveness of the risk and fraud management policy, of the efficacy of the
internal control policies and procedures , as also enquire of management, and others
within the entity as appropriate, to determine whether there are any pending or concluded
matters in/under vigilance, investigation , internal enquiries and whether they have
knowledge of any actual, suspected or alleged fraud affecting the entity.
Banking Companies – The Companies Act 2013

Section 143 of the Companies Act 2013 (the “Act”) deals with the powers and duties of the
auditors and auditing standards. Sub sections (12) and (13) of section 143 of the Act,
dealing with reporting on frauds, (as substituted by the Companies (Amendment) Act 2015,
effective May 14, 2015), state as under:

“(12) Notwithstanding anything contained in this section, if an auditor of a company, in
the course of the performance of his duties as auditor, has reason to believe
that an offence of fraud involving such amount or amounts as may be
prescribed, is being or has been committed in the company by its officers or
employees, the auditor shall report the matter to the Central Government within
such time and in such manner as may be prescribed:
Provided that in the case of a fraud involving lesser than the specified amount,
the auditor shall report the matter to the audit committee constituted under
section 177 or to the Board in other cases within such time and in such
manner as may be prescribed:
Provided further that the companies , whose auditors have reported frauds
under this sub section to the audit committee or to the Board but not reported
to the Central Government, shall disclose the details about such frauds in the
Board’s Report in such manner as may be prescribed:
“(13) No duty to which an auditor of a company may be subject to shall be regarded as
having been contravened by reason of his reporting the matter referred to in sub-
section (12) if it is done in good faith.”
Attention is also drawn to section 447 of the Act, which (while dealing with punishment for
fraud for the purpose of that Section), defines “fraud” {in Explanation (i)}, having certain
ingredients, as under:
“Explanation.—For the purposes of this section—
i. “fraud” in relation to affairs of a company or any body corporate, includes any act,
omission, concealment of any fact or abuse of position committed by any person or
any other person with the connivance in any manner, with intent to deceive, to gain
undue advantage from, or to injure the interests of, the company or its shareholders
or its creditors or any other person, whether or not there is any wrongful gain or
wrongful loss;
ii. “wrongful gain” means the gain by unlawful means of property to which the person
gaining is not legally entitled;
iii. “wrongful loss” means the loss by unlawful means of property to which the person
losing is legally entitled.”
An analysis of the above . will make it clear that:
a. It must be in relation to the affairs of the Company or any body corporate,
b. It includes
 any act, omission, concealment of any fact or
 abuse of position
c. It must be committed by any person or any other person with the connivance in any
manner,
d. It must be with intent to deceive, to gain undue advantage from, or to injure the
interests of,
 the company or
 its shareholders or
 its creditors or
 any other person,
e. There may or may not be any wrongful gain {defined in clause (ii)} or wrongful
loss{defined in clause (iii)}.
Since offence of fraud under the Companies Act, 2013 is in relation to affairs of a company,
fraudulent acts committed by “any other person” also amount to fraud under the Act, if such
acts are in relation to the affairs of the company.

The amended section now requires reporting by the auditor, any offence of fraud in
excess of the prescribed limits and its scope has been widened. Prior to its
amendment in May 2015, Section 143(12) required the auditor to report to the Central
Government, offences relating only to officers and employees and involving frauds
as were against the Company. Other offences were not required to be reported
within the strict interpretation of that section, though such offences, if proven as
frauds, within the meaning of section 447 {say by abetment/connivance as per the
definition of “fraud” - see ( c) above}), would be subject to punishment under section
447 of the Act.
It needs to be reiterated that there is punitive action on the auditor concerned for non
reporting to the Central Govt., of the offence involving fraud as per section 143(15) of
the Act, and punishment on the professional for non compliance can involve a fine
which shall not be less than one lakh rupees but which may extend to twenty-five lakh
rupees.
Sections 448 and 449 of the Companies Act 2013, respectively deal with punishment
for false statement and for false evidence.
If in any return, report, certificate, financial statement, prospectus, statement or other
document required by, or for, the purposes of any of the provisions of the Act or the rules
made thereunder, any person makes a statement,
a. which is false in any material particulars, knowing it to be false; or
b. which omits any material fact, knowing it to be material, he shall be liable under section
447.
If any person intentionally gives false evidence:
a. upon any examination on oath or solemn affirmation, authorised under the Act; or
b. in any affidavit, deposition or solemn affirmation, in or about the winding up of any
company under the Act, or otherwise in or about any matter arising under the Act, he
shall be punishable with imprisonment for a term which shall not be less than three years
but which may extend to seven years and with fine which may extend to ten lakh rupees.
It will be observed from the definition of fraud contained in the Explanation to section
447 of the Act, that a person shall be treated as guilty of an offence involving fraud
under the Act, if the following is involved:
Nature of Offence Section
of the Act
a. Furnishing false information or suppressing material fact in documents or declaration filed 7(5)
for incorporation of a company
b. Misstatements in prospectus 34
c. Fraudulent inducements to invest, making false promises, forecasts or statements 36(1)
d. Personation for acquisition of securities, or making multiple applications for acquiring 38
securities
e. Issue of duplicate shares with intent to defraud 46(5)
f. Transfer of shares with intent to defraud 56(7)
g. Reduction of capital- concealing name of creditor or misrepresenting amount or nature of 66(10)
debt
h. Auditor acting in fraudulent manner or in fraud by or in relation to a company 140(5)
i. Carrying on of business of Company for a fraudulent or unlawful purpose 206(4)
j. Business of the company carried on with intent to defraud creditors, members or any other 213
person or for fraudulent or unlawful person
k. Furnishing false statement, mutilation, destruction of documents, falsification of documents 229
during the course of inspection/inquiry/ investigation
l. Fraudulent application for removal of name 251(1)
m. Carrying on business of a company with intent to defraud creditors or for any fraudulent 339(1)
purpose
n. False statement in any return, statement, prospectus or other document for purposes of any 448
provision of the Act

As per the provisions of section 212(6) of the Act, the above offences are cognizable and
no person accused of any offence under above sections can be released on bail unless the
Public Prosecutor has been given an opportunity to oppose the bail for such release and
where he opposes the bail, the court is satisfied of grounds that may be reasonable for
believing that such accused person is not guilty and that he is not likely to commit any
offence while on bail.
There is provision of establishment of Special Courts to try the offences under the Act and
pending such establishment, the offences are to be tried by a Court of Session exercising
jurisdiction over the area (refer Section 440 of the Companies Act 2013).
Rules relevant to reporting by the auditor, in terms of Section 143(12) of the Act
Rule 13 of the Companies (Audit and Auditors) Rules, 2014 that, as substituted by the
Companies (Audit and Auditors) Amendment Rules , 2015, requires Reporting of frauds
by auditor and other matters amended heading), states as under:
Substituted Rules Remarks
“13. Reporting of frauds by auditor and “and other matters” has been added
other matters:
(l) lf an auditor of a company’s in the The word ”statutory” has been added to the
course of the performance of his duties word “auditor”, whereas in other clauses the
as statutory auditor, has reason to word auditor continues.
believe that an offence of fraud, which The words earlier used in the Rules “sufficient
involves or is expected to involve reason to believe” have been aligned to the
individually an amount of rupees one Act. What constitutes “reason to believe” ,
crore or above, is being or has been should be interpreted as having the element of
committed against the company by its certainty that it is a reportable fraud. “Reason
officers or employees , the auditor shall to suspect “ would not require reporting.
report the matter to the Central The words “against the company” were
Government earlier used in the Act prior to its amendment
in May 2015, but the Rule continues to use this
verbiage, to restrict the reporting requirement.
If a fraud is committed by officers or
employees, against other than the company,
or if committed by others against the company
where the company may be a victim, due to
the negligence , but not arising from ill intent
of the officers or employees, this strictly may
not require reporting.
It is not understood as to why the words
“Offence involving fraud” have been
substituted by the words “offence of fraud”.
Every offence is not fraud, though every fraud
is an offence. Necessarily what is reportable is
a “fraud” as defined and understood.
“Report” has a connotation, in that it contains
expression of an opinion based on proper
enquiry, dispelling of doubts/suspicion/bias,
the gathering of all facts, evidence and
exercise of judgement to determine that the
offence has all the ingredients /elements of
fraud.

(2) The auditor shall report the matter to the
Central Government as under :
(a) the auditor shall report the matter to the “but not later than two days” has been
Board or the Audit Committee, as the case inserted ….of his knowledge of the fraud. The
may be, immediately but not later than two issue here is the point in time that he comes in
days of his knowledge of the fraud seeking “knowledge of the fraud”. A mere suspicion,
their reply or observations within forty-five
doubts about certain unwarranted economic
days;
or other events, correlated to some staff
action of misdemeanour/misconduct/
unintended irregularity arising out of
inefficiency/deficiency, may not be tainted as
an offence of fraud, unless concluded after a
due process on facts and evidence and the
auditors knowledge thereof prior to that
conclusion, may not be a reportable matter.
(b) on receipt of such reply or observations, The insertion of the words” from the date”
the auditor shall forward his report and the makes no difference to the substance of the
reply or observations of the Board or the Audit matter.
Committee along with his comments (on such Once having issued his report or observations
reply or observations of the Board or the Audit
to the ACB or the Board, of fraud involving
Committee) to the Central Government within
fifteen days from the date of receipt of such more than the stipulated amount, he has no
reply or observations ; option but to report the matter to the Central
Govt., based on the reply he gets (even if it is
held out that there is no fraud), as also report
his earlier observations where he does not get
any response, as mentioned in sub clause (c)
(c) in case the auditor fails to get any reply or The failure is not on the part of the auditor, but
observations from the Board or the Audit of the management to give a response. What
Committee within the stipulated period of is intended is that , if he does not get a
forty-five days, he shall forward his report to response to his observations/report, he can
the Central Government along with a note
forward his report
containing the details of his report that was
earlier forwarded to the Board or the Audit
Committee for which he has not received any
reply or observations;
(d) the report shall be sent to the Secretary ,
Ministry of corporate Affairs in a sealed cover
by Registered Post with Acknowledgement
Due or by Speed Post followed by an e-mail
in confirmation of the same;
(e) the report shall be on the letter-head of the The words “telephone” and “mobile number”
auditor containing postal address’ email have been inserted
address and contact telephone number or
mobile number and be signed by the auditor
with his seal and shall indicate his
Membership Number; and
(f) the report shall be in the form of a Form ADT- 4 has not been basically amended,
statement as specified in Form ADT-4 except for the consequential changes in the
clause numbers. Certain clauses are not in line
with the Act, as discussed hereinafter.

(3) In case of a fraud involving lesser than Frauds, involving less than the stipulated
the amount specified in sub-rule (l ), the amount and not reportable in Form ADT - 4 to
auditor shall report the matter to Audit the Central Govt., are otherwise required to be
Committee constituted under section 177 reported by the auditor to the Audit Committee
or to the Board immediately but not later
or Board, giving only the following information:
than two days of his knowledge of the
fraud and he shall report the matter (a) Nature of Fraud with description;
specifying the following:- (a) Nature of (b) Approximate amount involved: and
Fraud with description; (b) Approximate (c) Parties involved
amount involved: and (c) Parties involved.
(4) The following details of each of the It is the responsibility of the Board to
fraud reported to the Audit Committee or incorporate in their Report, the following, in
the Board under sub-rule (13) during the respect of each fraud reported to the Audit
year shall be disclosed in the Board’s Committee or the Board (irrespective of the
Report :- (a) Nature of Fraud with
amount involved):
description; (b) Approximate Amount
involved; (c) Parties involved, if remedial (a) Nature of Fraud with description;
action not taken: and (d) Remedial actions (b) Approximate Amount involved;
taken. (c) Parties involved, if remedial action not
taken: and
(d) Remedial actions taken.
(5) The provision of this rule shall also apply, There is no change
mutatis mutandis , to a Cost Auditor or a
Secretarial Auditor during the performance of
his duties under section 148 and section 204
respectively.”;
The Form prescribed (ADT-4), for complying with the requirements of Rule 13(4) of the
Companies Audit and Auditors Rules 2014, in connection with reporting of fraud by the
auditor to the Central Government, inter alia, includes the following clauses:
“5) Address of the office or location where the suspected offence is believed to have been or is
being committed
6) Full details of the suspected offence involving fraud (attach documents in support)
7) Particulars of the officers or employees who are suspected to be involved in the commission
of the offence, if any:
a) Name(s) : b) Designation c) If Director, his DIN d) PAN
8) Basis on which fraud is suspected
9) Period during which the suspected fraud has occurred
……………………
13) Estimated amount involved in the suspected fraud”
What needs to be reported is the actual offence of fraud, as per the requirements of the Act
and the Rules, but the prescribed Form requires response under various clauses mentioned
above, based on suspicion, which reporting is not warranted. The Form, pursuant to the
Rules , is not in line with the clear requirements of the law as the following matters cannot
be considered as reportable under the Act:
 “suspected offence” believed to have been committed,
 “suspected offence involving fraud”,
 particulars of the “officers or employees suspected to be involved” ,
 basis on which fraud is “suspected”,
 the period during which the “suspected fraud” has occurred and
 “estimated amount” involved in the “suspected fraud”
The Rules , being subservient to the express provisions of law, cannot override the
law to extend/curtail/modify such clear /express provisions; and the reporting
requirement cannot be extended to cover any suspected offence unless such offence is
actually determined and concluded as fraud.
The phrase “suspected offence” or “suspected fraud” is fraught with uncertainty

caused by feelings of doubt or suspicion, where all facts and evidence (external and
internal), have yet to be considered , based on due enquiries/ investigative process and a
judicious approach, that may also warrant examination of the suspects and witnesses.
Belief , can be understood to imply an element of certainty, a feeling of being sure that
someone or something exists, or that something is true, or as a conviction of the truth of
some statement, or the reality of some being or phenomenon but based only on
examination of evidence. To be in a position to report on offences in the nature of, or
involving, fraud, the auditor needs to be convinced "beyond a reasonable doubt" that it is
offence that has the elements of fraud, based on preponderance of the evidence, rather
than relying on preponderance of probabilities or to a moral certainty.
There is, thus, a vast difference between reporting a suspected offence or suspected
fraud and an offence that can be termed as an “offence of fraud”, considering that in the
Act ,the verbiage used is “reason to believe” and not “reason to suspect” in relation to an
offence of fraud.
The “auditor’s reason to believe” that an offence of fraud is being or has been committed,
though expected to be based on application of mind to facts, cannot take the shape of a final
opinion/report, unless there is exercise of judgment on the totality of facts that are
adequately substantiated and duly documented, based on a due investigative process.
Board of Directors Report to include details of frauds reported by auditors to the
Audit Committee/Board, other than those reportable directly by auditors to the
Central Government:
Pursuant to the Companies Amendment Act 2015, vide Notification F.No.1/6/2015-CL. V

dated May 29, 2015 with immediate effect , in sub-section (3), after clause (c), clause “(ca)”
was inserted, requiring that the Report of the Board of Directors to include details in respect
of frauds reported by auditors under sub-section (12) of section 143 other than those which
are reportable to the Central Government.
Master Direction of the Reserve Bank of India

(Refer RBI Circular DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated July 01, 2016 )
Considering that the primary responsibility for prevention and detection of frauds
rests with the Management, the RBI has also directed that with prior approval of the
Board of Directors, the Managements of banks, will frame their internal policy for
fraud risk management and fraud investigation function, at the level of the CEO, the
Audit Committee of the Board and the Special Committee of the Board, with focus
on effective and timely investigation and prompt and accurate reporting not only to
the law enforcing agencies , but also to RBI (at the level of the General Manager
designated for this purpose).
The scope of audit work in banks would cover reporting on:
 Anything susceptible to fraud
 Fraudulent activity
 Act of excess power
 ‘smell foul play’ in any transaction
The banks are expected to have a set of prescribed procedures and criteria based on which
the events or transactions having serious irregularities are analysed and an operating
framework for tracking and dealing with frauds and these should be structured along the
following three tracks:
i. Detection and reporting of frauds
ii. Corrective action and
iii. Preventive and punitive action

While defining a ‘fraud’ based on the guidelines issued by RBI, banks may clearly
demarcate/ distinguish the occurrence of an event on account of negligence ‘in conduct of
duty’ and from collusion’ by the bank staff (within the bank or with the borrowers/customers
with an intention for self gain to the detriment of the bank). Instances of ‘willful default’ by
borrowers also need to be dealt with; and a willful default would be deemed to have
occurred if any of the following events, is observed:
(a) Defaults by borrower Unit in meeting its payment / repayment obligations despite its
capacity to honour its obligations.
(b) Diversion of funds for other than the specific purpose of the lending.
(c) Siphoning off of the funds from the business financed.
(d) Alienating, without the knowledge of the lender bank, the assets charged to it by the
borrower Unit.
The intention to defraud needs to be kept in mind, even if no fraud has taken place.
The causa proxima of the fraud, (‘system failure’ or ‘human failure’) needs to be
reported to the designated “Competent Authority”.
The help of the law enforcement agencies is imperative for corrective action to recover the
amount siphoned off, based on a quick investigation to aswcertain the destination where,
and the persons with whom, the related assets are located.
Preventive action as appropriate to address the ‘system failure’ and/ or punitive action as
prescribed internally for ‘human failure’ should be initiated immediately and completed
expeditiously.
NEED FOR ROBUST INTERNAL RISK CONTROL AND MANAGEMENT SYSTEMS

Banks face varied risks in the conduct of their operations, and the key driver behind
profitability depends on how well these risks (inherent business risks and control
risks), are understood, identified and managed based on systems that need to be
evaluated.
The main risks faced by banks include:
Credit Risk risk of loss arising from a borrower who does not make payments as
promised
Liquidity Risk risk that a given security or asset cannot be traded quickly enough in
the market to prevent a loss (or make the required profit).
Market Risk risk that the value of a portfolio, either an investment portfolio or a
trading portfolio, will decrease due to the change in value of the market
risk factors
Operational risk arising from execution of business functions
Risk
Reputational related to the trustworthiness of business
Risk
Audit Risks In EDP environment

Lack of internal control Loss of audit trail
systems; Non - review of and inaction/non compliance of matters
Inadequate internal arising out of exceptional reports (systems/ transactions)
controls; and Lack/breach of security systems (hardware/ software)
Breach of internal controls related to all areas of operations
Heavy reliance is placed in banks, on the existence of Internal controls In all areas of
their business and operations and the key aspects, particularly risks arising from
extensive computerization that instantly and in the shortest time frame, capture and
record all economic events and transactions that affect the financials of the banks.
There are mainly four types of controls.

A. Deterrent that are designed, including with punitive measures, to deter people,
internal as well as external, from doing undesirable activities, through
written procedures.
B. Preventive that prevent the cause of exposure from occurring or at least minimise the
probability of unlawful event taking place, e.g., security controls at various
levels like hardware, software, application software, database, network, etc.
C. Detective that bring to surface, the existence of unlawful events (aimed at arresting
the adversities/detriment caused or likely to be caused).
D. Corrective that are designed to recover from a loss situation. Business Continuity
Planning and disaster recovery is a corrective control. Without corrective
controls in place, the bank has risk of loss of business and other losses due
to its inability to recover essential IT based services, information and other
resources after the disaster has taken place.
The controls in CIS environment would include those related to :
a. Controls on execution and recording of various e-banking and internet banking
products; and manual intervention/processing of items/events not covered.
b. Quality of MIS reports being generated and the periodicity thereof.
c. Major exception reports and the process of generation and compliance thereof.
d. Parameterisation of the statutory and regulatory requirements and its updating
e. Process of generating information related to various disclosures in the financial
statements and the involvement of, and dependence on, the IT systems.
f. Dealing with, and resolution of , data/system corruption, system break-down, etc.,
having bearing on the integrity of the data and consequently on the preparation
and presentation of financial statements.
g. Customer complaints related to mistakes in transactions (interest application,
balances, unauthorized access to accounts or withdrawals, non compliance of
instructions etc.).
Conducting an audit in a CIS environment warrants evaluation of the effectiveness of

controls, i.e., policies and procedures which the bank implements to minimise the
events and circumstances, the occurrence of which could result in the risk of a
pecuniary loss or other detriment.
The function of laying down controls, implementation and review thereof, is done at
the centralized level. At the Branch level and other decentralized offices, the auditor
barely has access to the systems and their validations, if any, related to the scope
and areas of his work and his reporting responsibilities; and the branch audits are
conducted on the presumption of adequacy and effectiveness of the laid down
systems, that capture the voluminous transactions and events pertaining to the
branch from internal and extraneous sources.
If not satisfied, the auditor must consider what disclaimer can be given in his report.
Beyond audit, the need for Investigative and Forensic Accounting services.
The framers of law in India, of late, have gone by a misconception that audit skills
necessarily include investigative skills and cover detection and reporting on offences of
frauds, and severe punitive action for non reporting. Falling within a wide range of what is
wrong or improper, an offence, can include delinquency, fault, lapse, breach of a moral or
social code / custom, misdemeanour, misdeed, transgression, malfeasance,
violation/breach of law. It is clear that if it is a mere offence, it need not be reported
unless it involves fraud. It must be made clear , and as also recognized internationally,
that the scope and objectives for assignments concerning offences in the nature of fraud,
require an investigative mindset and also involve knowledge and skills related to other
disciplines such as assurance, information technology, business valuation, corporate
finance, tax, private investigation; and reporting can also require placing reliance on
outsourced technical services, strictly outside the area of finance and accounting.
An investigative mindset requires a skeptical attitude in the identification, pursuit,
analysis and evaluation of information relevant to each engagement, contemplating that it
may be biased, false and/or incomplete. This is applicable in identifying and assessing
relevant issues, assessing the plausibility of the underlying assumptions, assessing
substance over form, and developing hypotheses for the purpose of addressing the issues
under investigation.
Frauds can be caused by internal (due to involvement by officers or employees), or by
external agencies, taking advantage of the non existent or weak/vulnerable internal control
systems, or ill equipped employees of the target entity. Without getting into the psychology
of fraud, one needs to come to terms with the fact that trust reposed in the officers and
employees within the Bank, has been breached. Fraudsters tend to be clever, creative and
more seasoned and regardless of how robust the internal controls are, fraudsters will always
concoct ways to circumvent these in a manner that their activities will go
undetected. Notwithstanding job-related stress, fraudsters tend to avoid taking vacations, as
doing so could uncover their schemes and for this reason mandatory vacation policies and
job rotations are part of the system to help mitigate this risk.
Fraudsters also tend to give internal and external auditors a hard time and question why
certain information is required and provide alternative information in an effort to satisfy such
requests.
The modus operandi of the fraud will emerge and clearly get established as one conducts
forensic investigation, mostly post-mortem. There is an increasing demand for Investigative
and Forensic Accounting services. Such engagements, are those that:
a. require the application of professional accounting skills, investigative skills, and an
investigative mindset; and
b. involve disputes or anticipated disputes, or where there are risks, concerns or
allegations of fraud or other illegal or unethical conduct.
Professional accountants may also need knowledge and training with regard to anti-money
laundering reporting requirements , on which RBI has been issuing guidelines.
Professional accounting skills require the following sub-components:

a. an understanding of how the bank’s business activites are documented, recorded,
reported, managed and controlled;
b. the ability to
identify, obtain, examine and evaluate relevant information;
and explain information and the results of the financial analyses to quantify the
financial impact of actual or expected transactions or events;
perform and interpret relevant analyses of information;
document decision-making purposes; and
render relevant and appropriate opinions and conclusions based on the findings and
results of the work performed.
Investigative skills require the following sub-components:

a. an understanding of
the context within which the engagement is to be conducted (the applicable statutory,
regulatory, contractual impositions/ obligations and the laid down business policies
and ethical requirements relevant to the engagement);
the types of information that would assist in establishing motivation, intent and bias;
the ways in which information could be fabricated or concealed;
how that information collected and the work performed, including the work and
information of others, may become subject to disclosure and be tendered as
evidence;
b. the ability to
identify, obtain, examine and assess information relevant to the engagement;
analyse and compare various types and sources of information;
document and present investigative findings and conclusions for decision making
purposes.
Lack of/ inadequacy in, and breach of Internal control systems and procedures are the
primary risk factors and become the primary causes of frauds. For various transactions and
economic events, the control parameters are expected to be correctly built into the
computerised systems which enable generation of ‘daily exception reports’ both as regards
transactions as well as the systems.
Such reports need to be taken seriously and action taken immediately to remedy the
aberrations.
In accordance with the Guidelines, the Bank needs to have, and review, at periodic
intervals, its fraud risk management framework, in particular relating to staff being
equipped with the requisite skills:
a. for key and sensitive posts such as those in dealing rooms, treasury, relationship
managers for high value customers, heads of specialized branches, etc. The
appropriateness of such postings should be subjected to periodic review.
b. with a laid down policy for “staff rotation” and “mandatory leave” for staff, with strict
implementation thereof included in the scope of, and reporting by, internal / concurrent
auditors. The decisions taken / transactions effected by officers and staff not rotated/
availing leave as per policy should be subjected to comprehensive examination by the
internal / concurrent auditors.
c. by building up a database of officers/ staff identified as those having aptitude for
investigation, data analysis, forensic analysis, etc. and expose them to appropriate
training in investigations and forensic audit.
It may be relevant to state that the risk of the auditor not detecting a material
misstatement resulting from management fraud is greater than for employee fraud,
because management is frequently in a position to directly or indirectly manipulate
accounting records, present fraudulent financial information or override control
procedures designed to prevent similar frauds by other employees.
GUIDELINES OF THE RESERVE BANK OF INDIA – A SUMMARY

A. CLASSIFICATION OF FRAUDS (classified mainly on the provisions of the Indian
Penal Code)
In order to have uniformity in reporting, frauds (not involving theft, burglary or dacoity to be
separately reported to RBI in Form FMR -4)), have been classified as under:
(a) Misappropriation and criminal breach of trust.
(b) Fraudulent encashment through forged instruments, manipulation of books of account
or through fictitious accounts and conversion of property.
(c) Unauthorised credit facilities extended for reward or for illegal gratification.
(d) Negligence and cash shortages.
(e) Cheating and forgery.
(f) Irregularities in foreign exchange transactions.
(g) Any other type of fraud not coming under the specific heads as above.
Cases of 'negligence and cash irregularities in foreign exchange transactions ‘shortages'

and those ‘referred to in items (d) and (f) above are to be reported as fraud if the intention
to cheat/ defraud is suspected/ proved.
However, where fraudulent intention is not suspected/proved at the time of detection will be
treated as fraud and reported accordingly in cases of cash shortage more than Rs. 10,000/-,
(including at ATMs) and Rs. 5,000/- if detected by management / auditor/ inspecting officer
and not reported on the day of occurrence by the persons handling cash.
REPORTING OF FRAUDS TO RBI AND REVIEWS

REPORTING OF FRAUDS TO RESERVE BANK FMR 1 return should be filed except in fraud cases
OF INDIA(including where central investigating involving amount below Rs.0.1 million
agencies have initiated criminal proceedings suo
moto and/or where the Reserve Bank has
directed that such cases be reported as frauds)
DELAYS IN REPORTING OF FRAUDS Banks must report frauds, including at foreign branches
(except in case of foreign banks having branches
overseas); and do so by strictly adhering to the
timeframe fixed for reporting fraud cases to RBI failing
which they would be liable for penal action prescribed
under Section 47(A) of the Banking Regulation Act, 1949
QUARTERLY RETURNS Report on Frauds Outstanding - FMR 2 Progress
Report on Frauds - FMR 3
Special Committee of the Board While Audit Committee of the Board (ACB) may continue
to monitor all the cases of frauds , banks are required to
constitute a Special Committee of the Board for
monitoring and follow up of cases of frauds , the major
function of which would be to monitor and review all the
frauds of Rs.10 million and above so as to:
a. Identify the systemic lacunae if any that facilitated

perpetration of the fraud and put in place measures
to plug the same.
b. Identify the reasons for delay in detection, if any,
reporting to top management of the bank and RBI.
c. Monitor progress of CBI/Police investigation and
recovery position.
d. Ensure that staff accountability is examined at all
levels in all the cases of frauds and staff side action,
if required, is completed quickly without loss of time.
e. Review the efficacy of the remedial action taken to
prevent recurrence of frauds, such as strengthening
of internal controls.
Quarterly Review of Frauds Quarterly Review - the main aspects to be considered

while making such review may include the following:
Banks are expected to collate and provide a. Whether the systems in the bank are adequate to
information to the ACB by way of Quarterly detect frauds, once they have taken place, within the
Review of Frauds, besides placing an annual shortest possible time.
review before the Board of Directors/Local b. Whether frauds are examined from staff angle and,
Advisory Board for information. The reviews for wherever necessary, the cases are reported to the
the year-ended March need to be put up to the Vigilance Cell for further action in the case of public
Board before the end of the following quarter i.e. sector banks.
quarter ended June 30th. Such reviews need to c. Whether deterrent punishment is meted out, wherever
be internally preserved for verification by the warranted, to the persons found responsible.
Reserve Bank’s inspecting officers. d. Whether frauds have taken place because of laxity in
following the systems and procedures and, if so,
whether effective action has been taken to ensure that
the systems and procedures are scrupulously
followed by the staff concerned.
e. Whether frauds are reported to local Police or CBI, as
the case may be, for investigation, as per the
guidelines issued in this regard to public sector banks
by Government of India.
REPORTS TO THE BOARD (Rs. 0.1 million and Reporting of frauds quarterly review of fraud cases
above, promptly on detection) Annual reviews should also, among other things,
Annual Review of Frauds include the following details:
a. Total number of frauds detected during the year and
the amount involved as compared to the previous two
years.
b. Analysis of frauds according to different categories
and also the different business areas indicated in the
Quarterly Report on Frauds Outstanding (vide FMR
2).
c. Modus operandi of major frauds reported during the
year along with their present position.
d. Detailed analysis of frauds of Rs.0.1 million and
above.
e. Estimated loss to the bank during the year on account
of frauds, amount recovered and provisions made.
f. Number of cases (with amounts) where staff are
involved and the action taken against staff.
g. Region-wise/Zone-wise/State-wise break-up of frauds
and amount involved.
h. Time taken to detect frauds (number of cases
detected within three months, six months and one
year of their taking place).
i. Position with regard to frauds reported to CBI/Police.
j. Number of frauds where final action has been taken
by the bank and cases disposed of.
k. Preventive/punitive steps taken by the bank during the
year to reduce/minimise the incidence of frauds.
On the basis of a review of the fraud reporting mechanism to the Regional Offices/Central Fraud Monitoring Cell
(CFMC) of the RBI was undertaken it has been decided to effect some changes in the same. Accordingly
effective 21-01-2016,
a. Frauds of Rs. 0.1 million and above but below Rs. 50 million will be monitored by the respective Regional
Office of RBI under whose jurisdiction the Head Office of the bank falls / Senior Supervisory Manager (SSM)
of the bank. Frauds of Rs.50 million and above will be monitored by CFMC, Bengaluru, and
b. Flash reports are to be sent in fraud cases of Rs.50 million and above to the CGM-i-C, DBS, CO with a copy
to CFMC at Bengaluru as against the present limit of Rs. 10 million and above.
Banks need not send the hard copies of the FMR-1 returns. Instead a monthly certificate (as given in Annex-1
below), should be submitted to the effect that soft copy of all the frauds of Rs. 0.1 million and above, to be
reported to the RBI in a month, has been sent to dbscofrmc@rbi.org.in. The certificate is to be sent to CFMC,
Bengaluru with a copy to the respective Regional Office of RBI under whose jurisdiction the Head Office of the
bank falls /SSM of the bank, within seven days from the end of the month.
Monthly certificate in respect of submission of fraud cases through FMR-1 to be sent as per Annexure III
to RBI Master Directions
Name of the bank:

Certificate for the month: Date:
It is certified that soft copy of the following fraud cases, which were to be reported to RBI during the
month ------------------, have been sent to RBI by mail.
Name of the Amount Involved
Sr. Fraud Number Date sent
Party (Rs. lakh)
No.
Signature
Name & Designation of the authorized official

Refer para 3.1 of the Master Directions ), ,given below:
Medium
Amount
in which To whom it should be
Name of the return involved in Timeline for reporting Remarks
to be reported
the fraud
reported
FMR 1 Frauds Soft copy Central Fraud Monitoring Within three weeks of A Monthly certificate as per
Report on actual or involving Cell (CFMC), Bengaluru. detection Annex – III (mentioning that
suspected frauds Rs. 0.1 soft copy of all the FMRs -1
A format of the million and have been submitted to RBI)
return is given in above is to be submitted by the
Annex II bank to CFMC, Bangaluru
with a copy to the
respective Regional Office
of RBI under whose
jurisdiction the Head Office
of the bank falls/SSM of the
bank, within seven days
from the end of the month.
Hard Through a DO letter Within a week of such Should include amount
For frauds copy addressed to the PCGM/ frauds coming to the involved, nature of fraud,
Flash report for involving ₹ CGM-in-Charge, DBS notice of the bank’s modus operandi in brief, name
frauds involving 50 million RBI, Central Office, head office of the branch/ office, names of
amounts of ₹ 50 and above Mumbai with a copy to parties involved, their
million and above. CFMC Bengaluru constitution names of
proprietors/ partners and
directors, names of officials
involved and lodging of
complaint with police/CBI.
FMR 2 Quarterly Soft copy CFMC Bengaluru Within 15 days of the Nil report to be submitted if no
A format of the report on only end of the quarter to fraud is outstanding.
return is given in frauds which it relates
Annex II outstanding
FMR 3 Case-wise Soft copy CFMC Bengaluru Within 15 days of the Nil report to be submitted if
A format of the quarterly only end of the quarter to there are no frauds above ₹
return is given in progress which they relate. 0.1 million
Annex II reports on outstanding.
frauds
involving [No change]
Rs. 0.1
million and
above
CASES OF ATTEMPTED FRAUD
Though not required to be reported to RBI, cases of attempted frauds need to be placed before the
ACB, covering the modus operandi, how the attempted fraud was averted and the measures,
systems and controls taken or required to be taken for the necessary safeguards.
CLOSURE OF FRAUD CASES

This would involve:
 The final disposal of fraud cases pending with CBI/Police/Court .
 staff accountability being determined
 write off , or recovery, including from Insurance
CHEQUE RELATED FRAUDS, PRECAUTIONS TO BE TAKEN

Illustrative list of some of the preventive measures they may be followed:.
a. Ensuring the use of 100% CTS - 2010 compliant cheques.
b. Strengthening the infrastructure at the cheque handling Service Branches and bestowing
special attention on the quality of equipment and personnel posted for CTS based clearing, so
that it is not merely a mechanical process.
c. Ensuring that the beneficiary is KYC compliant so that the bank has recourse to him/ her as
long as he/she remains a customer of the bank.
d. Examination under UV lamp for all cheques beyond a threshold of say, Rs.0.2 million.
e. Checking at multiple levels, of cheques above a threshold of say, Rs.0.5 million.
f. Close monitoring of credits and debits in newly opened transaction accounts based on risk
categorization.
g. Sending an SMS alert to payer/drawer when cheques are received in clearing.
Banks may also consider the following preventive measures for dealing with suspicious or large value
cheques (in relation to an account’s normal level of operations):
a. Alerting the customer by a phone call and getting the confirmation from the
payer/drawer.
b. Contacting base branch in case of non-home cheques.
GUIDELINES FOR REPORTING FRAUDS TO POLICE/CBI

Amount involved in the Agency to whom complaint should
Category of bank Remarks
fraud be lodged
Private Sector/ Rs.10000 and above State Police If committed by staff
Foreign Banks If committed by outsiders on their own
Rs.0.1 million and above State police and/or with the connivance of bank
staff/officers.
Rs10 million and above In addition to State Police, SFIO, Details of the fraud are to be reported to
Ministry of Corporate Affairs, SFIO in FMR 1 Format.
Government of India. Second Floor,
Paryavaran Bhavan, CGO Complex,
Lodhi Road, New Delhi 110 003.
Public Sector Below Rs.30 million State Police To be lodged by the bank branch
Banks 1. Above Rs. 10,000/- but To the local police station concerned
below ₹0.1 million
2. Rs.0.1 million and To the State CID/Economic Offences To be lodged by the Regional Head of
above involving outsiders Wing of the State concerned the bank concerned
and bank staff
Rs.30 million and above CBI To be lodged with Anti Corruption Branch
and up to Rs.250 million of CBI (where staff involvement is prima
facie evident)
Economic Offences Wing of CBI (where
staff involvement is prima facie not
evident)
More than Rs.250 million CBI To be lodged with Banking Security and
and up to ₹500 million Fraud Cell (BSFC) of CBI (irrespective of
the involvement of a public servant)
More than Rs.500 million CBI To be lodged with the Joint Director
(Policy) CBI, HQ New Delhi
LOAN FRAUDS - NEW FRAMEWORK

Attention is drawn to Para 8 of the Master Directions that deals with Loan Frauds, that
guides as to early warning systems (EWS) and Red Flagged Accounts(RFA), early detection
and reporting, staff empowerment and in situations where the bank is a sole lender as well
as under multiple lending arrangements. It also deals with Staff accountability and the role of
the reporting auditors.
Reporting to RBI is to be the responsibility of an official of the rank of General
Manager, the reports to be as per the software on FRAUDS REPORTING AND
MONITORING SYSTEM.
AREAS /MATTERS THAT NEED TO BE CONSIDERED IN AUDIT

AREAS OF CONCERN Remarks
INTERNAL CONTROL SYSTEMS The auditor would be advised to enquire (in writing) into matters:
AND PROCEDURES -  Pending in vigilance
ABSENCE, INADEQUACY IN,
 Internal enquiry into misdemeanour in transactions and
AND BREACH OF WELL LAID
DOWN CONTROL SYSTEMS
events
AND PROCEDURES  Cases where criminal proceedings have been initiated by
 Whether the systems in the Investigating agencies
bank are adequate to  Where RBI may have directed to treat any case as a fraud
detect frauds, within the case
shortest possible time, once  Customer complaints
they have taken place,.  Complaints with the banking Ombudsman
 Whether frauds have taken  System breaches reported, including through “Daily Exception
place because of laxity in reports”, non reporting of unusual transactions, loss/misuse of
following the systems and security paper stationery etc.
procedures and, if so,  Non observance of Guidelines relating to Anti Money Laundering,
whether effective action has KYC norms and dealings with Willful defaulters (RBI Master Circular
been taken to ensure that the DBR.No.CID.BC. 22/20.16.003/2015-16 dated 1.7.2015) that might
systems and procedures are result in frauds.
scrupulously followed by the
staff concerned.
RISKS ATTACHED TO  Extensive use of Nominal Heads, that result in creation,
EXTENSIVE USE OF retention of credits and originating debits
NOMINAL HEADS  Existence of old/large outstandings in nominal heads
DELINQUENCY IN Critical / security paper stationery comprises numbered Forms,

CUSTODY AND CONTROL cheque books/leaves, Withdrawal slips, Pay Order Forms,
OVER CRITICAL/SECURITY Bankers Cheques, Demand Drafts, and other similar stationery
PAPER STATIONERY for issuing such instruments. Risks of fraud increase, if there is
delinquency arising from:
 Breach of dual controls over receipt, custody or issue of the
same
 Missing/lost stationery forms
 Precautions not taken in issue and delivery of such stationery
to the recipients entitled to use the same
UNRECORDED Non recording of obligations in the nature of .contingent

CONTINGENT liabilities and commitments assumed, that may result in a
LIABILITIES/OBLIGATIONS potential liability to the Bank including obligations assumed by
AND OFF BALANCE SHEET way of Letters of Comfort/Letter of Undertaking (in connection
EXPOSURES with Trade Credits or otherwise)
Wrongful continuation/assumption of contingent liabilities in the
books, beyond the expiry dates of the earlier recorded
obligations, or when the obligations cease.
UNSUBSTANTIATED  In dormant and inoperative deposit accounts and other
ORIGINATING AND OTHER accounts frozen at the branch level
DEBITS AND MISUSE OF  Against old unclaimed/unpaid balances in the accounts of
CREDITS depositors
 Against old credits not identified to specific customers. and
remaining unreconciled in the manually maintained accounts,
prior to computerization of records
Accumulation of credits in Bills Payable (Pay Orders, Bankers
Cheques), that remain unreviewed
LOSS OF CONTROL OVER Banks appear to have lost control over domestic deposits that
CREDITS COMPRISING are being renewed automatically on maturity, as well as forex
TERM DEPOSITS deposits.
Upon maturity, entries are automatically generated in the books
to auto renew the deposits and the bank is at risk due to:
 Credits not represented by issuance of Fresh deposit receipts
in cancellation of the old ones (that continue to remain in the
custody of the depositors);
 Where deposit receipts are issued (and that also on non
securitized paper), these are not dispatched to the
depositors, but may remain in the physical custody of the
Branch Officials without any dual controls;
 Where the existing deposit receipts are renewed by
endorsement on the inverse thereof, without control over the
recording of the same;
The bank runs the risk of misuse of the credits in connivance with
the bank officials, including if used as security, by unauthorized
persons, for loans against the same at any branch of the bank .
(FCNR(B) deposits cannot be auto renewed in the system as
the status of the depositor may have changed on the dates of
maturity of the Deposit Receipts).
DELINQUENCY IN DEPOSIT  Not observing “Know your customer” norms, while opening
ACCOUNTS new accounts
 Not updating the existing information on depositors
 Wrongful reactivation of, and allowing withdrawals in dormant
and inoperative accounts without following the control
systems
 Frequent opening and closing of accounts and allowing large
transactions therein
 Non centralization of the old/frozen accounts
 Withdrawals from overdue/old credits without due care and
caution.
 Not taking precautionary measures while clearing large debits
and allowing large transactions to go unreported
UNRECONCILED These deposits are made by Corporates and other entities to
MERCHANT DEPOSIT fund payments to be made to their constituents towards
ACCOUNTS dividends, interest, refunds and other similar obligations.
INTER BRANCH - ARREARS (Old/unexplained and other entries over six months old in
OF MATCHING/ various nominal heads at the Branch level); further, there being
RECONCILIATION OF very old outstanding unmatched entries at debit without
ENTRIES corresponding credits, in heads like Bills Payable, where
credits precede debits credits.
Unattended communications from the Head office Inter
branch Reconciliation Cell , to the branch.
UNLINKED DEBITS IN BILLS In drafts paid without advice, retention of such debits not warranted by
PAYABLE, BANKER’S the system.
CHEQUES AND SIMILAR  Against old credits picked up from the system upon migration from
INSTRUMENTS manually maintained accounts to computerized system, or
otherwise.
 By creation or retention of unauthorized or wrongful credits or
allowing retention of credits for potential misuse, e.g., unreviewed
Banker’s cheques, Pay Orders and other such instruments that
have not been presented.
LARGE CASH (above Rs.10 Large, frequent and unusual transactions that go unreported;
lakhs each) AND UNUSUAL or those not permitted (e.g. Bank Drafts over Rs.50,000 against
/IMPERMISSIBLE cash), Sudden opening of several Customer Accounts, e.g. for
TRANSACTIONS new share issues.
(these would also require review of Daily Exceptional Reports
generated in the EDP Environment)
EVERGREENING OF Attempts to evergreen the accounts that are problematic through
ACCOUNTS ON FREQUENT rehabilitation, restructuring, re-schedulement, re-phasement,
BASIS allowing frequent ad hocs, frequent excesses, and sometimes
remedied through window dressing and accommodation from
other unconnected accounts.
WCT/FITL/WCDL ACCOUNTS are clearly indicative of these, as
arise out of defaults in servicing of debts
Attempts to route entries through nominal accounts to
temporarily keep the advances within the limits or drawing power
and be seen as default-free.
ACCOMODATION BILLS TO The underlying transactions, if not prima facie genuine, will result
OBTAIN AND USE BANK in providing funds where these are not warranted. Bank finance
FINANCE, WITHOUT ANY is utilized for the period of the bill and the amounts
GENUINE TRADE returned/covered by more bills on due dates. It is possible that
TRANSACTION the purchaser of goods, though liable for bills acceptances,
obtains finance from the same or another bank in respect of
unpaid for stocks.
INAPPROPRIATE In an attempt to keep problematic advances out of default and
COMPUTATION OF DP being identified as NPAs, the limits and Drawing Power (DP),
may be be kept high enough in credit facilities against security of
stocks, by inappropriate computation of the DP . Generally, the
value of the stocks is considered at higher than normal realizable
value and the margins are computed without deduction of value
of unpaid for stocks , contrary to RBI directives( of April 1993).
Unpaid for stocks (including acceptances) comprised in Sundry
Creditors/Other liabilities in the books of the Borrower need to be
deducted from the value of eligible value of inventories, before
applying margin to arrive at the DP.
Attempt to pledge the hypothecated stocks or obtain credit from
the same other banks against warehouse receipts the same
stock.

APPRAISAL SYSTEM/NON Reasons for Quick mortality in advances, say within 12-24
IDENTIFICATION OF, AND months of sanction should be enquired into as these will
ADVANCES TO WILFUL indicate lapses in appraisal.
DEFAULTERS ON THE LIST Wilful Defaulters:
OF RBI Pursuant to the instructions of the Central Vigilance Commission
for collection of information on wilful defaults of Rs.25 lakhs and
above by RBI and dissemination to the reporting banks and FIs,
a scheme was framed by RBI with effect from 1st April 1999
under which the banks and notified All India Financial Institutions
were required to submit to RBI the details of the wilful defaulters.
As per the Master Circular of RBI
(DBR.No.CID.BC.22/20.16.003/2015-16 dated 1-7-2015), a
default to be categorised as ‘wilful” must be intentional,
deliberate and calculated and such default would be deemed to
have occurred if the borrowing Unit has defaulted in meeting its
payment / repayment obligations to the lender :
 even when it has the capacity to honour the said obligations,

or
 has not utilised the finance from the lender for the specific
purposes for which finance was availed of but has diverted
the funds for other purposes, or
 has siphoned off the funds so that the funds have not been
utilised for the specific purpose for which finance was availed
of, nor are the funds available with the unit in the form of other
assets, or
 has also disposed off or removed the movable fixed assets or
immovable property given for the purpose of securing a term
loan without the knowledge of the bank / lender.
Diversion of Funds should be construed to include any one of the
undernoted occurrences
 utilisation of short-term working capital funds for long-term
purposes not in conformity with the terms of sanction;
 deploying borrowed funds for purposes / activities or creation
of assets other than those for which the loan was sanctioned;
 transferring borrowed funds to the subsidiaries / Group
companies or other corporates by whatever modalities;
 routing of funds through any bank other than the lender bank
or members of consortium without prior permission of the
lender;
 investment in other companies by way of acquiring equities /
debt instruments without approval of lenders;
 shortfall in deployment of funds vis-à-vis the amounts
disbursed / drawn and the difference not being accounted for.
Siphoning of Funds should be construed to occur if any funds

borrowed from banks / FIs are utilised for purposes unrelated to
the operations of the borrower, to the detriment of the financial
health of the entity or of the lender, adjudged by lenders on the
facts and circumstances.
Role of auditors (as per Para 2.7 of the Circular)

In case any falsification of accounts on the part of the
borrowers is observed by the banks / FIs, and if it is
observed that the auditors were negligent or deficient in
conducting the audit, they should lodge a formal complaint
against the auditors of the borrowers with the Institute of
Chartered Accountants of India (ICAI) to enable the ICAI
to examine and fix accountability of the auditors.
With a view to monitoring the end-use of funds, if the
lenders desire a specific certification from the borrowers’
auditors regarding diversion / siphoning of funds by the
borrower, the lender should award a separate mandate to
the auditors for the purpose. To facilitate such certification
by the auditors the banks and FIs will also need to ensure
that appropriate covenants in the loan agreements are
incorporated to enable award of such a mandate by the
lenders to the borrowers / auditors.
Role of Internal Audit / Inspection (as per Para 2.8 of
the Circular)
The aspect of diversion of funds by the borrowers should
be adequately looked into while conducting internal
audit/inspection of their offices/branches and periodical
reviews on cases of wilful defaults should be submitted to
the Audit Committee of the bank.

NON UPDATING OF Potential loss of revenue, comprising charges and interest
RECORDS OF THE BANK, contractually due but not realized in NPAs (and held either as
LIKE UNAPPLIED INTEREST Interest Suspense or similar account) and that recorded in
in NPAs memorandum form, if not properly computed and kept updated,
has the risk of short/wrong recording as revenue , when realized.
Because it is not reflected in the Bank’s published accounts,
there may be a casual approach to updating this information on
records and the same may not be given due importance in audit.
In one time settlement of dues, restructuring proposals etc. the
precise verified amounts need to be kept in mind for waiver of
the unrealized portion/sacrifice.
Right of Recompense in accounts restructured/ rehabilitated is
not recorded and accounts upgraded without recovery of the
same.
DOCUMENTS PERTAINING Risk of lax controls over loan processed
TO ADVANCES BEING IN papers/documentation/sanction, not being in consonance
CENTRALISED CONTROL with what is conveyed to the branch concerned, by the
AND CUSTODY OF OFFICES Offices/branches that control documentation relating to
(Loan Processing Centers), business recorded at the linked branches; and non-
OTHER THAN THE BRANCH authenticity of the papers and the terms of sanction and
WHICH MAINTAINS THE updates thereof.
ADVANCE ACCOUNTS
NON/DELAYED The most important of the reports, is the System Audit
COMPLIANCE OF Report, where all the parameters required to be built in, may
INSPECTION AND OTHER be missing, leading to inappropriate end results. System
REPORTS deficiencies should not be allowed to continue and must not
be ignored. If not built in, in accordance with the guidelines
of the RBI and as per the applicable accounting norms, the
exception reports will also be faulty.
Remedial action, if not taken, in respect of adverse
observations in the reports internally generated while
monitoring, supervision and control and from outsourced
agencies, would increase the risk of frauds and errors.
LOANS AGAINST GOLD AND Lax control over the pouches containing gold/jewellery as
ORNAMENTS certified and sealed, would have the risk of fraud.
FRAUDS IN HOUSING This lists out the type of frauds that have taken place as per the report of
the Committee on Frauds in Housing Finance, as under:
FINANCE
1.Fabrication of income documents (Income tax return/salary slips/balance
(Refer THE INITIAL circular sheet)
UBD No. 2.Loans disbursed (cheques/drafts) by banks are encashed by third
BPD.15/12.05.01/2004-05 parties/agents
3. Title documents being forged – stamped documents forged by borrower
dated 1-9-2004)
Customer/builder
4. Over valuation of the property
5. Multiple financing
6. Cancellation of booking of flats/property by collusion
7. Sale of property by loanee without clearing the loan
8. Misrepresentation of end use of the loan
9. Sale of the property by builder without clearing/repaying construction funding
loan availed from the bank/housing finance companies
FRAUDS IN NON RESIDENT Mainly these would arise on misuse of and access to funds of
ACCOUNTS(Refer initial RBI the bank’s constituents and the misuse of their deposits for
Circular DBS.FrMC.No. obtaining overdrafts, unauthorisedly and while the constituents
3/23.04. 001/ 2004-05 dated are not available in India.
26-8-2004)
END USE OF FUNDS - RBI had cautioned the banks to address the shortcomings
MONITORIING (diversion and (including crediting of term loan disbursements to the
misuse of the borrowings) current/cash credit accounts of borrowers and utilisation thereof

for day-to-day operations, as also, exclusive reliance on
Chartered Accountants’ certification both in regard to infusion of
promoters' contribution and deployment of banks' funds).
Effective monitoring of the end use of funds has critical
importance in safeguarding the bank’s interest and also acts as
a deterrent for borrowers to misuse the credit facilities; the
efficacy of the existing machinery in the bank for post-sanction
supervision and follow-up of advances needs to be evaluated
and made robust.
Illustratively, the RBI had suggested that the systems and
procedures should broadly include the following:
i. meaningful scrutiny of the periodic progress reports and
operating/financial statements of the borrowers;
ii. regular visits to the assisted units and inspection of securities
charged/ hypothecated to the banks;
iii. periodic scrutiny of the books of accounts of the borrowers;
iv. introduction of stock audits depending upon the extent of
exposure;
v. obtaining of certificates from the borrowers that the funds
have been utilised for the purposes approved and in case of
incorrect certification, initiation of prompt action as may be
warranted, which may include withdrawal of the facilities
sanctioned and legal recourse as well. In case a specific
certification regarding diversion/siphoning of funds is desired
from the auditors of the borrowers, a separate mandate may be
awarded to them and appropriate covenants incorporated in
the loan agreements; and
vi. examination of all aspects of diversion of funds during internal
audit/ inspection of the branches and at the time of periodic
reviews.
Special attention also needs to be paid to the contents of the
Auditor’s report to the shareholders of the companies, on
diversion, if any, of funds or long term borrowings used
other than for the purpose for which these were obtained.
NON VERIFICATION OF Though the auditors are not expected to check currency
CURRENCY CHEST chest balances, they should enquire and be satisfied that
BALANCES BY BANK, the reporting to RBI of the balances has been made as per
LEADING TO CLAIMS ON the system laid down and basic safeguards have been taken
THE BANK BY RBI, FOR to protect the interests of the bank. In case of any
SHORTAGES, FORGERIES loss/shortage in currency chests, the Bank may have to
AND FRAUDS (ARISING OUT make good the loss.
OF NON OBSERVANCE OF
THE LAID DOWN
GUIDELINES OF THE RBI)
SAFE CUSTODY ARTICLES Risk of fraud exists in Missing and tampered with packages
containing safe custody articles that would invite claims for
losses to the constituents.
The auditor needs to ensure that there are no claims from
customers in this regard and for wrongful opening of safe deposit
lockers.
EXTENSIVE  OLD OUTSTANDINGS PICKED UP FROM MANUAL

COMPUTERISATION (AND RECORDS, REMAINING UNADJUSTED
BUNDLE OF RISKS  DOUBLE DEBITS - FOR THE SAME TRANSACTION IN
ATTACHED) MANUALLY MAINTAINED ACCOUNTS AND
COMPUTERISED ACCOUNTS ON MIGRATION TO EDP
ENVIRONMENT
 SECURITY SYSTEMS NOT IN PLACE FOR
HARDWARE/SOFTWARE
 NON ROTATION OF STAFF DUTIES
 BACK UPS/ OFF SITE STORAGE. SYSTEMS NOT IN
FORCE OR NOT TESTED
 DAILY EXCEPTIONAL REPORTS TAKEN LIGHTLY
 PRINT OUTS NOT TAKEN OF THE BOOKS
REGULARLY/HARD COPIES NOT FILED PROPERLY
 EFFECTIVE DATES NOT OBSERVED FOR CHANGES IN
THE SYSTEM/SOFTWARE…. e.g. CHANGES IN INTEREST
RATES
 NO INFORMATION SYSTEMS AUDIT
 MANUAL INTERVENTION TO EDP DATA – CONTROL
ISSUES
PROVISIONS FOR CASES OF FRAUD

Attention is drawn to Para 4.2.9 of the RBI Master Circular on Prudential norms on
Income Recognition, Asset Classification and Provisioning pertaining to Advances
(DBR.No.BP.BC.2/21.04.048/ 2015-16 dated July 1 2015), as regards accounts where there
are potential threats for recovery or erosion in the value of security, serious credit
impairment or frauds committed by borrowers; and particularly to sub para 4.2.9.(ii) more
specific to provisioning norms in respect of all cases of fraud. The relevant part of the said
Para is reproduced hereunder:
The entire amount due to the bank (irrespective of the quantum of security held
against such assets), or for which the bank is liable (including in case of deposit
accounts), is to be provided for over a period not exceeding four quarters
commencing with the quarter in which the fraud has been detected;
However, where there has been delay, beyond the prescribed period, in reporting the
fraud to the Reserve Bank, the entire provisioning is required to be made at once. In
addition, Reserve Bank of India may also initiate appropriate supervisory action
where there has been a delay by the bank in reporting a fraud, or provisioning there
against.
The issues for consideration are as follows:

The sub Para deals with provision for loss or detriment to the Bank, caused due to frauds,
including those related to Deposits (for wrongful/fraudulent withdrawals from, or debits in
Deposit accounts, whether or not claims have been made by the customers), or in case of
the advances. The use of the words “irrespective of the quantum of security held
against such assets” logically cannot apply to the Deposits portfolio as no security is held
by the Bank as part of any documentation related to Deposits.
If loss is caused and is to be borne by the Bank, the RBI guides that the provision for the
entire amount is required, but spreading it {over four (calendar) quarters commencing with
the quarter in which the fraud has been detected}/ deferment of any portion thereof, is
neither logical nor understood. Any provision required and not made, needs to be viewed in
the light of Section 15 of the Banking Regulation Act 1949, non compliance of which is
reportable.
The use of the verbiage “quarters commencing with the quarter in which the fraud has
been detected”. Detection is a stage prior to the conclusive establishment of the fraud and
the consequential loss/detriment caused. A mere irregularity, error, suspicion or absence of
intent to commit a fraud, or necessitating an internal or other enquiry, that may not have
any element of fraud, or that which is capable of redressal , may not be the reason/cause
to provide for the anticipated /potential loss attributed to fraud. Thus “detection” of fraud will
have to be correctly and realistically interpreted. It appears that RBI desires provision for
potential losses caused by fraud, but the use of the word “detected” may make it difficult to
decide the precise point in time when this is to be done.
In addition to the penal action prescribed under Section 47(A) of the Banking Regulation
Act, 1949 to which the banks are exposed (as per Para 3.3 of the RBI Master Directions
DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated July 01, 2016 ), the delay in the
reporting of the fraud (as per the aforesaid sub paras), beyond the prescribed period (period
of delay not prescribed), has the consequences of the entire mandatory provision to be
made forthwith (at once), in respect of the loss arising from frauds. The reporting
requirements are dealt with as per Para 3 of the Master Directions
DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated July 01, 2016 ), summarized as under:
Report (in format FMR 1 on actual or suspected frauds) - within three weeks of
detection
Flash report (in addition to FMR 1) for frauds in excess of Rs.50 million – Within a week of
such frauds coming to the notice of the bank’s head office.
Fraud reports - to be submitted in cases where central investigating agencies have initiated
criminal proceedings suo moto and/or where RBI directs such cases being reported as
frauds. (This is unrelated to detection by the bank, but recording thereof). Though not
specifically dealt with in the said sub Para, logically these need immediate provision for
losses caused or anticipated.
Banks may also report frauds perpetrated in their subsidiaries and affiliates/joint ventures(
in FMR 1 format), unless such entities are regulated by RBI and are independently required
to report fraud cases to RBI as per guidelines applicable to them.
It appears that the provision needs to be made irrespective of the possibility of any
security /possible recovery out of guarantees/insurance coverage.
The auditor is duty bound to seek a representation as to whether any matters or events
have come to the notice of the Management that there are any frauds that have been
detected or require reporting; and further whether there is any delay in the reporting of the
frauds within the meaning of the RBI guidelines covered by RBI Master Circulars (Para 4.2.9
(ii) of the DBR.No.BP.BC.2/21.04.048/ 2015-16 dated July 1, 2015or (Paras 3.1 and 3.3) of
the RBI Master Directions No. DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated July 01,
2016 ),
In addition the attention of the Auditor is also drawn to the verification/coverage/reporting of

frauds as per requirements of Minimum Audit Programme for Concurrent Audit System in
Commercial Banks as per Annexure II of the RBI Circular DBS.CO.ARS.No. BC.
2/08.91.021/2015-16 dated July 16, 2015; and he needs to ensure that the Concurrent audit
reports have covered this aspect in the scope of their assignment.
Attention is also drawn to Para 8.7 (Incentive for Prompt Reporting) applicable to cases of
accounts classified as ‘fraud’, where banks are required to make provisions to the full
extent immediately, irrespective of the value of security.

The para also states further that, in case a bank is unable to make the entire provision
in one go, it may now do so over four quarters provided there is no delay in reporting
In case of delays, the banks under Multiple Banking Arrangements (MBA) or member banks
in the consortium are required to make the provision in one go in terms of the said circular.
Delay, for the purpose of the circular, would mean that the fraud was not flashed to CFMC,
RBI or reported on the CRILC platform or RBI, within a period of one week from its
classification as a fraud through the RFA route which has a maximum time line of six months
or detection/declaration as a fraud ab initio by the bank.

FRAUD MONITORING RETURN FMR 1
Report on Actual or Suspected Frauds in Banks (Vide Paragraph 3 of the Master Directions)
Part A: Fraud Report
1. Name of the bank
1 1
2. Fraud number Fraud number: This has been introduced with a view to facilitate
computerisation and cross reference.
The number will be an alphanumeric field consisting of the following:
four alphabets (to indicate name of bank),
two digits for the year (02, 03, etc.),
two digits for the quarter (01 for January – March quarter, etc.) and
the final four digits being a distinctive running number for the fraud reported
during the quarter.
2 2
3. Details of the branch Name of the branch: In case the fraud relates to more than one branch,
indicate the name of only one branch where the amount involved has been the
highest and/or which is mainly involved in following up the fraud.
The names of the other branches may be given in the brief history/modus
operandi against item number 9.
(a) Name of the branch
(b) Branch type
c) Place
(d) District
(e) State
3
4. Name of the Principal Name of party: A distinctive name may be given to identify the fraud. In the
3
party/account case of frauds in borrowal accounts, name of the borrowers may be given.
In the case of frauds committed by employees, the name(s) of the
employee(s) could be used to identify the fraud.
Where fraud has taken place, say, in clearing account/inter-branch account,
and if it is not immediately possible to identify the involvement of any particular
employee in the fraud, the same may be identified merely as “Fraud in
clearing/inter-branch account”.
4
5.a Area of operation where the Area of operation where the fraud has occurred:
4
fraud has occurred Indicate the relevant area out of those given in column 1 of statement FMR 2
(Part A) (Cash; Deposits (Savings/Current/Term); Non-resident accounts;
Advances (Cash credit/Term Loans/Bills/Others);
Foreign exchange transactions;
Interbranch accounts; Cheques/demand drafts, etc.;
Clearing, etc. accounts;
Off-balance sheet(Letters of credit/Guarantee/Co-acceptance/Others);
Card/Internet - Credit Cards ; ATM/Debit Cards ;
Internet Banking ;
Others).
5.b Whether fraud has occurred Yes/No
in a borrowal account ?
5 5
6.a Nature of fraud Nature of fraud: Select the number of the relevant category from the
following which would best describe the nature of fraud:
(1) Misappropriation and criminal breach of trust,
(2) Fraudulent encashment through forged instruments/manipulation of books
of account or through fictitious accounts and conversion of property,
(3) Unauthorised credit facilities extended for reward or for illegal gratification,
(4) Negligence and cash shortages,
(5) Cheating and forgery,
(6) Irregularities in foreign exchange transactions,
(7) Others.
6.b Whether computer is used in
committing the fraud?
6.c If yes, details
6 6
7. Total amount involved (` in Total amount involved: Amounts should, at all places, be indicated in `
million) million up to two decimal places.

Report on Actual or Suspected Frauds in Banks (Vide Paragraph 3 of the Master Directions) Contd.
7
8.a Date of occurrence 7 Date of occurrence: In case it is difficult to indicate the exact date of
occurrence of fraud (for instance, if pilferages have taken place over a period
of time, or if the precise date of a borrower’s specific action, subsequently
deemed to be fraudulent, is not ascertainable), a notional date may be
indicated which is the earliest likely date on which the person is likely to have
committed the fraud (say, January 1, 2002, for a fraud which may have been
committed anytime during the year 2002). The specific details, such as the
period over which the fraud has occurred, may be given in the history/modus
operandi.
8 8
b Date of detection Date of detection: If a precise date is not available (as in the case of a fraud
detected during the course of an inspection/audit or in the case of a fraud
being reported such on the directions of the Reserve Bank), a notional date on
which the same may be said to have been recognised as fraud may be
indicated
c Reasons for delay, if any, in
detecting the fraud
d Date on which reported to 9 Date of reporting to RBI: The date of reporting shall uniformly be the date
9
RBI of sending the detailed fraud report in form FMR 1 to the RBI and not any
date of fax or DO letter that may have preceded it.
* Banks have to categorically mention the nature of audit the branch is
subjected to viz, concurrent audit, internal inspection, etc.
e Reasons for delay, if any, in
reporting the fraud to RBI
9.a Brief history
b modus operandi
10. Fraud committed by Yes/No
a Staff
b Customers Yes/No
c Outsiders Yes/No
11.a Whether the controlling Yes/No
office (Regional/Zonal) could
detect the fraud by a scrutiny of
control returns submitted by the
branch
b Whether there is need to Yes/No
improve the information
system?
12.a Whether internal Yes/No*
inspection/ audit (including * Mention the type/s of inspection / audit the branch is subjected to
concurrent audit) was
conducted at the branch(es)
during the period between the
date of first occurrence of the
fraud and its detection?
b If yes, why the fraud could not
have been detected during such
inspection/audit.
c What action has been taken
for non-detection of the fraud
during such inspection/audit
13. Action taken/proposed to be
taken
a Complaint with Police/ CBI
i) Whether any complaint has been Yes/No
lodged with the Police/CBI?
ii) If yes, name of office/ branch of
CBI/ Police
1. Date of reference
2.Present position of the case
3. Date of completion of Police/CBI
Investigation
4. Date of submission of
investigation report by Police/CB

Report on Actual or Suspected Frauds in Banks (Vide Paragraph 3 of the Master Directions) Contd.
iii) If not reported to Police/CBI,
reasons therefor
b Recovery suit with DRT/Court

i) Date of filing
ii) Present position
c Insurance claim
Whether any claim has been Yes/No
lodged with an insurance
company
If not, reasons therefor
d Details of staff-side action

i) Whether any internal Yes/No
investigation has been/is
proposed to be conducted
ii) If yes, date of completion
Whether any departmental
enquiry has been/is proposed to
be conducted
If yes, give details as per format

given below:
If not, reasons therefor
e Steps taken/proposed to be
taken to avoid such incidents
14.(a) Total amount recovered
i) Amount recovered from
party/parties concerned
ii) From insurance
iii) From other sources
(b) Extent of loss to the bank
(c) Provision held
(d) Amount written off
15. Suggestions for
consideration of RBI
Staff side action
No Name Designatio Whether Date of Date of Date of Date of Punishm Details
. n. suspende issue of commencem completi issue of ent of
d/ charge ent of on of final awarded prosec
Date of sheet domestic inquiry orders ution/
suspensio inquiry convic
n tion/
acquitt
al, etc.
Mention the type/s of inspection / audit the branch is subjected to

Part B: Additional Information on Frauds in Borrowal Accounts
(This part is required to be completed in respect of frauds in all borrowal accounts involving an amount
of `0.5 million and above)
Sr. No. Type of party Name of party/account Party Address

Borrowal accounts details:
Party Sr. Name of party/ Borrowal Nature of Date of Sanctioned Balance
No account account Sr. Account Sanction limit outstanding
No.
Borrowal account Director/proprietor details:

Name of party/account Sr.No. Name of Director/Proprietor Address
Associate Concerns:
Name of party/account Sr. No. Associate Name of Associate Address
Concern Concern
Associate Concern Director/proprietor details:

Name of Associate Sr. No. Name of Director Address
Concern
Annexure I to the RBI Master Directions lists out some early warning signals which should alert the bank officials
about some wrongdoings in the loan accounts which may turn out to be fraudulent, as under:
1. a) Default in undisputed payment to the statutory bodies as declared in the Annual report.
b) Bouncing of high value cheques
2. Frequent change in the scope of the project to be undertaken by the borrower
3. Foreign bills remaining outstanding with the bank for a long time and tendency for bills to remain
overdue.
4. Delay observed in payment of outstanding dues.
5. Frequent invocation of BGs and devolvement of LCs.
6. Under insured or over insured inventory.
7. Invoices devoid of TAN and other details.
8. Dispute on title of collateral securities.
9. Funds coming from other banks to liquidate the outstanding loan amount unless in normal course.
10. In merchanting trade, import leg not revealed to the bank.
11. Request received from the borrower to postpone the inspection of the godown for flimsy reasons.
12. Funding of the interest by sanctioning additional facilities.
13. Exclusive collateral charged to a number of lenders without NOC of existing charge holders.
14. Concealment of certain vital documents like master agreement, insurance coverage.
15. Floating front / associate companies by investing borrowed money
16. Critical issues highlighted in the stock audit report.
17. Liabilities appearing in ROC search report, not reported by the borrower in its annual report
18. Frequent request for general purpose loans.
19. Frequent ad hoc sanctions.
20. Not routing of sales proceeds through consortium I member bank/ lenders to the company.
21. LCs issued for local trade I related party transactions without underlying trade transaction
22. High value RTGS payment to unrelated parties.
23. Heavy cash withdrawal in loan accounts.
24. Non production of original bills for verification upon request.
25. Significant movements in inventory, disproportionately differing vis-a-vis change in the turnover.
26. Significant movements in receivables, disproportionately differing vis-à-vis change in the turnover
and/or increase in ageing of the receivables
27. Disproportionate change in other current assets
28. Significant increase in working capital borrowing as percentage of turnover
29. Increase in Fixed Assets, without corresponding increase in long term sources (when project is
implemented).
30. Increase in borrowings, despite huge cash and cash equivalents in the borrower's balance sheet
31. Frequent change in accounting period and/or accounting policies
32. Costing of the project which is in wide variance with standard cost of installation of the project
33. Claims not acknowledged as debt high
34. Substantial increase in unbilled revenue year after year.
35. Large number of transactions with inter-connected companies and large outstanding from such
companies
36. Substantial related party transactions
37. Material discrepancies in the annual report
38. Significant inconsistencies within the annual report (between various sections)
39. Poor disclosure of materially adverse information and no qualification by the statutory auditors
40. Raid by Income tax /sales tax/ central excise duty officials
41. Significant reduction in the stake of promoter /director or increase in the encumbered shares of
promoter/director.
42. Resignation of the key personnel and frequent changes in the management

NATURE OF DISCLOSURES IN NOTES ON ACCOUNTS K
(Refer RBI Master Circular DBR.BP.BC No.23/21.04.018/2015-16 dated July 1, 2015)
S. No Nature of disclosure
1# Capital - Capital Adequacy Ratio
Capital Adequacy Ratio - Tier I capital
Capital Adequacy Ratio - Tier II capital
Percentage of Shareholding of Government of India in the nationalized banks.
Amount of subordinated debt raised as Tier-II capital
Amount raised by issue of IPDI
Amount raised by issue of Upper Tier-II Instruments
2# Investments (In/outside India)

Gross value of investments
Provisions made towards depreciation in the value of Investments
Net value of investments
Movement of provisions held towards depreciation on investments
Repo Transactions – Securities purchased/sold
Non-SLR Investment Portfolio –Issuer Composition- Non Performing
Sale and transfers to/ from HTM Category
Derivatives - Forward Rate Agreement/ Interest Rate Swap
- Exchange Traded Interest Rate Derivatives
Disclosures on risk exposure in derivatives-Qualitative/Quantitative
3. Asset Quality
NPAs - Percentage of Net NPAs to Net advances
Movements in NPAs (Gross/Net) – Provisions for NPAs
4 Details of Loan assets subjected to Restructuring

Restructuring under CDR/SME/Others
5 Details of financial assets sold to SC/RC for Asset Reconstruction
6 Details of non performing financial assets purchased/sold
7# Provision on Standard Assets
8# Business Ratios - Interest Income as a percentage to Working Funds

Non-interest Income as a percentage to Working Funds
Operating Profit as a percentage to Working Funds
Return on Assets
Business (deposits plus advances) per employee/ Profit per employee
9 Asset Liability Management - Maturity pattern of some Assets and Liabilities

Deposits; Advances; Investments; Borrowings; Foreign Currency Assets and
Liabilities
10 Exposures - Exposure to Real Estate Sector - Direct/ Indirect exposure
11# Exposure to Capital Market

Advances for and Investment in Equity Shares, etc & Bank Financing for Margin
Trading
12# Risk Category-wise Country Exposure

13# Details of Single Borrower/Group Borrower Limit exceeded by the bank
14 Unsecured Exposures – Rights, Licenses etc.
15# Provisions made towards Income Tax during the year
1
NATURE OF DISCLOSURES IN NOTES ON ACCOUNTS K
(Refer RBI Master Circular DBR.BP.BC No.23/21.04.018/2015-16 dated July 1, 2015)
16 Penalties imposed by RBI
17 Disclosures as per Accounting Standards – where RBI Guidelines have

been issued (AS 5, 9, 15,17,18,21,22,23,24.25 and others issued by ICAI)
18# Provisions and Contingencies

Floating Provisions
Drawdown from Reserves
19# Customer Complaints/Awards passed by Banking Ombudsman
20 Letters of Comfort issued
21# Provisioning Coverage Ratio
22 Bancassurance Business
23# Concentration of Deposits, Advances, Exposures, NPAs, Sector-wise NPAs

and movements, Overseas Assets, NPAs and Revenue
24 Off Balance Sheet SPVs sponsored
25 Unamortised Pension and Gratuity Liabilities
26# Disclosures on Remuneration

27 Disclosures relating to Securitisation
28 Credit Default Swaps
# Information not directly relevant at the Branch Level, or that collated on a centralized basis.
2
BANK BRANCH AUDIT (2017-18) - DISCLOSURES IN NOTES ON ACCOUNTS K.1
(Paragraph Nos. are the same as per the Master Circular for easy reference)
(Refer RBI Master Circular DBR.BP.BC No.23/21.04.018/2015-16 dated 1-7-2015)
3.1 Capital (Amount in Rs. crore)
Particulars Current Previous
Year Year
i) Common Equity Tier 1 capital ratio (%)
ii) Tier 1 capital ratio (%)
iii) Tier 2 capital ratio (%)
iv) Total Capital ratio (CRAR) (%)
v) Percentage of the shareholding of the Government of India in public
sector banks
vi) Amount of equity capital raised
vii) Amount of Additional Tier 1 capital raised; of which
Perpetual Non Cumulative Preference Shares (PNCPS):
Perpetual Debt Instruments (PDI):
viii) Amount of Tier 2 capital raised; of which
Debt capital instrument:
Preference Share Capital Instruments: [Perpetual Cumulative Preference
Shares (PCPS) / Redeemable Non-Cumulative Preference Shares (RNCPS)
/ Redeemable Cumulative Preference Shares (RCPS)]
*The total amount of subordinated debt through borrowings from Head Office for inclusion in Tier
II capital may be disclosed in the balance sheet under the head 'Subordinated loan in the
nature of long term borrowings in foreign currency from Head Office'.
** The total eligible amount of HO borrowings shall be disclosed in the balance sheet under the
head ‘Upper Tier II capital raised in the form of Head Office borrowings in foreign currency’.
3.2 Investments (Amount in Rs. crore)
Particulars Current Year Previous Year
(1) Value of Investments
(i) Gross Value of Investments
(a) In India
(b) Outside India,
(ii) Provisions for Depreciation
(a) In India
(b) Outside India,
(iii) Net Value of Investments
(a) In India
(b) Outside India.
(2) Movement of provisions held towards depreciation on
Investments.
(i) Opening balance
(ii) Add: Provisions made during the year
(iii) Less: Write-off/ write-back of excess provisions
during the year
(iv) Closing balance
3.2.1 Repo Transactions (Amount in Rs. crore)
(in face value terms) Minimum Maximum Daily Average Outstanding as
outstanding outstanding outstanding on March 31
during the during the during the year
year year
Securities sold under repo
i. Government securities
ii. Corporate debt securities
Securities purchased under
reverse repo
i. Government securities
ii. Corporate debt securities

3.2.2. Non-SLR Investment Portfolio
i) Issuer composition of Non SLR investments (Amount in Rs. crore)
No. Issuer Amount Extent of Private Extent of ‘Below Extent of Extent of
Placement Investment ‘Unrated’ ‘Unlisted’
Grade’ Securities Securities
Securities
(1) (2) (3) (4) (5) (6) (7)
(i) PSUs
(ii) FIs
(iii) Banks
(iv) Private Corporate
(v) Subsidiaries/ Joint Ventures
(vi) Others
(vii) Provision held towards XXX XXX XXX XXX
depreciation
Total *
Notes:(1) *Total under column 3 should tally with the total of Investments included under
the following categories in Schedule 8 to the balance sheet:
(a) Shares
(b) Debentures & Bonds
(c) Subsidiaries/joint ventures
(d) Others
(2) Amounts reported under columns 4, 5, 6 and 7 above may not be mutually exclusive
ii) Non performing Non-SLR investments (Amount in Rs. crore)

Opening balance
Additions during the year since 1st April
Reductions during the above period
Closing balance
Total provisions held
3.2.3 Sale and Transfers to / from HTM Category
If the value of sales and transfers of securities to / from HTM category exceeds 5 per cent of the
book value of investments held in HTM category at the beginning of the year, the bank should
disclose the market value of the investments held in the HTM category and indicate the excess of
book value over market value for which provision is not made. This disclosure is required to be
made in ‘Notes to Accounts’ in banks’ audited Annual Financial Statements. The 5 per cent
threshold referred to above will exclude:
(a) One time transfer of securities to / from HTM category with the approval of Board of Directors
permitted to be undertaken by banks at the beginning of the accounting year.
(b) Sales to the Reserve Bank of India under pre announced OMO auctions.
(c) Repurchase of Government Securities by Government of India from banks.
(d) Sale of securities or transfer to AFS / HFT consequent to the reduction of ceiling on SLR
securities under HTM at the beginning of January, July and September 2017, in addition to the
shifting permitted at the beginning of the accounting year, i.e. April 2017.
3.3 Derivatives
3.3.1 Forward Rate Agreement/ Interest Rate Swap (Amount in Rs. crore)
i) The notional principal of swap agreements
ii) Losses which would be incurred if counterparties failed to fulfill their
obligations under the agreements
iii) Collateral required by the bank upon entering into swaps
iv) Concentration of credit risk arising from the swaps $
v) The fair value of the swap book @
Note: Nature and terms of the swaps including information on credit and market risk and the accounting policies
adopted for recording the swaps should also be disclosed.
$ Examples of concentration could be exposures to particular industries or swaps with highly geared companies.
@ If the swaps are linked to specific assets, liabilities, or commitments, the fair value would be the estimated
amount that the bank would receive or pay to terminate the swap agreements as on the balance sheet date. For a
trading swap the fair value would be its mark to market value.
3.3.2 Exchange Traded Interest Rate Derivatives
S.No. Particulars Amount in Rs. crore
(i) Notional principal amount of exchange traded interest rate derivatives
undertaken during the year (instrument-wise)
a)
b)
(ii) Notional principal amount of exchange traded interest rate derivatives
outstanding as on 31st March …..
(instrument-wise)
a)
b)
(iii) Notional principal amount of exchange traded interest rate derivatives
outstanding and not ';highly effective'; (instrument-wise)
a)
b)
(iv) Mark-to-market value of exchange traded interest rate derivatives outstanding
and not ';highly effective'; (instrument-wise)
a)
b)
3.3.3 Disclosures on risk exposure in derivatives
Qualitative Disclosure
Banks shall discuss their risk management policies pertaining to derivatives with particular reference
to the extent to which derivatives are used, the associated risks and business purposes served. The
discussion shall also include:
a) the structure and organization for management of risk in derivatives trading,
b) the scope and nature of risk measurement, risk reporting and risk monitoring systems,
c) policies for hedging and/ or mitigating risk and strategies and processes for monitoring the
continuing effectiveness of hedges / mitigants, and
d) accounting policy for recording hedge and non-hedge transactions; recognition of income,
premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk
mitigation.
Quantitative Disclosures (Amount in Rs. crore)
Sl Particulars Currency Interest rate
.No Derivatives derivatives
(i) Derivatives (Notional Principal Amount)
a) For hedging
b) For trading
(ii) Marked to Market Positions
a) Asset (+)
b) Liability (-)
1
(iii) Credit Exposure [ ]
(iv) Likely impact of one percentage change in interest rate (100*PV01)
a) on hedging derivatives
b) on trading derivatives
(v) Maximum and Minimum of 100*PV01 observed during the year
a) on hedging
b) on trading
1
Banks may adopt the Current Exposure Method on Measurement of Credit Exposure of Derivative Products as per
extant RBI instructions.
3.4 Asset Quality
3.4.1 Non-Performing Assets (Amount in Rs. crore)
Current Year Previous Year
(i) Net NPAs to Net Advances (%)
(ii) Movement of NPAs (Gross)
(a) Opening balance
(b) Additions during the year
(c) Reductions during the year
(d) Closing balance
(iii) Movement of Net NPAs
(a) Opening balance
(b) Additions during the year
(c) Reductions during the year
(d) Closing balance
(iv) Movement of provisions for NPAs
(excluding provisions on standard assets)
(a) Opening balance
(b) Provisions made during the year
(c) Write-off/ write-back of excess provisions
(d) Closing balance

Disclosures required in respect of Divergence in Asset Classification and
Provisioning for NPAs
(Refer Annex of RBI Circular No. DBR.BP.BC.No. 63/21.04.018/ 2016-17 dated April 18,
2017)
(Rs in thousands)
Sr. Particulars Amount
1. Gross NPAs as on March 31, 20XX* as reported by the bank
2. Gross NPAs as on March 31, 20XX as assessed by RBI
3. Divergence in Gross NPAs (2-1)
4. Net NPAs as on March 31, 20XX as reported by the bank
5. Net NPAs as on March 31, 20XX as assessed by RBI
6. Divergence in Net NPAs (5-4)
Provisions for NPAs as on March 31, 20XX as reported by
7.
the bank
Provisions for NPAs as on March 31, 20XX as assessed by
8.
RBI
9. Divergence in provisioning (8-7)
Reported Net Profit after Tax (PAT) for the year ended March
10.
31, 20XX
Adjusted (notional) Net Profit after Tax (PAT) for the year
11. ended March 31, 20XX after taking into account the
divergence in provisioning
* March 31, 20XX is the close of the reference period in respect of which divergences
were assessed

3.4.2 Particulars of Accounts Restructured (Amount in Rs. crore)
Type of Restructuring Under SME Debt Restructuring
Under CDR Mechanism Others Total
→ Mechanism
Sl
Asset Classification → St- Sub St- Su- St- Su- St- Su-
No Do- Do- Do- Do-
an- St- Lo- To- an- bSt- Lo- To- an- bSt- Lo- To- an- bSt- Lo- To-
ubt- ubt- ubt- ubt-
da- and- ss tal da- and- ss tal da- and- ss tal da- and- ss tal
ful ful ful ful
Details ↓ rd ard rd ard rd ard rd ard
1 Restructured No. of
Accounts as borro-
on April 1 of wers
the FY
(opening Amount
figures)* outst-
anding
Prov-
ision
thereon
2 Fresh restru- No. of

cturing during borro-
the year wers
Amount
outst-
anding
Prov-
ision
thereon
3 Upgra- No. of
dations to borro-
restru- wers
ctured
standard Amount
category outst-
during the FY anding
Prov-
ision
there-
on
4 Restr- No. of
uctured borro-
standard wers
advances
which cease to
attract higher
provisioning
and / or
additional risk
weight at the
end of the FY
and hence
need not be
shown as Amount
restructured outst-
standard anding
advances at
the beginning
of the next FY
Prov-
ision
thereon
5 Downgr- No. of
adations of borro-
restructured wers
accounts
during the FY Amount
outst-
anding
Prov-
ision
thereon
6 Write-offs of No. of
restru- borro-
ctured wers
accounts
during the FY Amount
outst-
anding
7 Restru- No. of
ctured borro-
Accounts as wers
on March 31 of
the FY Amount
(closing outst-
figures*) anding
Prov-
ision
thereon
* Excluding the figures of Standard Restructured Advances which do not attract higher provisioning or risk weight (if applicable).
For the purpose of disclosure in the above Format, the following instructions are required to be followed:
(i) Advances restructured under CDR Mechanism, SME Debt Restructuring Mechanism and other categories of
restructuring should be shown separately.
(ii) Under each of the above categories, restructured advances under their present asset classification, i.e. standard,
sub-standard, doubtful and loss should be shown separately.
(iii) Under the 'standard' restructured accounts; accounts, which have objective evidence of no longer having inherent
credit weakness, need not be disclosed. For this purpose, an objective criteria for accounts not having inherent credit
weakness is discussed below :
(a) As regards restructured accounts classified as standard advances, in view of the inherent credit weakness in
such accounts, banks are required to make a general provision higher than what is required for otherwise
standard accounts in the first two years from the date of restructuring. In case of moratorium on payment of
interest / principal after restructuring, such advances attract the higher general provision for the period
covering moratorium and two years thereafter.
(b) Further, restructured standard unrated corporate exposures and housing loans are also subjected to an
additional risk weight of 25 percentage point with a view to reflect the higher element of inherent risk which
may be latent in such entities (cf. paragraph 5.8.3 of circular DBOD.No.BP.BC.90/20.06.001/2006-07 dated
April 27, 2007 on 'Prudential Guidelines on Capital Adequacy and Market Discipline - Implementation of the
New Capital Adequacy Framework' and paragraph 4 of circular DBOD.No.BP.BC.76/21.04.0132/2008-09
dated November 3, 2008 on 'Prudential Guidelines on Restructuring of Advances by Banks' respectively).
(c) The aforementioned [(a) and (b)] additional / higher provision and risk weight cease to be applicable after the
prescribed period if the performance is as per the rescheduled programme. However, the diminution in the
fair value will have to be assessed on each balance sheet date and provision should be made as required.
(d) Restructured accounts classified as sub-standard and doubtful (non-performing) advances, when upgraded
to standard category also attract a general provision higher than what is required for otherwise standard
accounts for the first year from the date of up-gradation, in terms of extant guidelines on provisioning
requirement of restructured accounts. This higher provision ceases to be applicable after one year from the
date of up-gradation if the performance of the account is as per the rescheduled programme. However, the
diminution in the fair value will have to be assessed on each balance sheet date and provision made as
required.
(e) Once the higher provisions and / or risk weights (if applicable and as prescribed from time to time by RBI) on
restructured standard advances revert to the normal level on account of satisfactory performance during the
prescribed periods as indicated above, such advances, henceforth, would no longer be required to be
disclosed by banks as restructured standard accounts in the "Notes on Accounts" in their Annual Balance
Sheets. However, banks should keep an internal record of such restructured accounts till the provisions for
diminution in fair value of such accounts are maintained.
(iv) Disclosures should also indicate the intra category movements both on upgradation of restructured NPA accounts
as well as on slippage. These disclosures would show the movement in restructured accounts during the financial
year on account of addition, upgradation, downgradation, write off, etc.
(v) While disclosing the position of restructured accounts, banks must disclose the total amount outstanding in all the
accounts / facilities of borrowers whose accounts have been restructured along with the restructured part or facility.
This means that even if only one of the facilities / accounts of a borrower has been restructured, the bank should also
disclose the entire outstanding amount pertaining to all the facilities / accounts of that particular borrower.
(vi) Upgradation during the year (Sl No. 3 in the Disclosure Format) means movement of 'restructured NPA' accounts
to 'standard asset classification from substandard or doubtful category' as the case may be. These will attract higher
provisioning and / or risk weight' during the 'prescribed period' as prescribed from time to time. Movement from one
category into another will be indicated by a (-) and a (+) sign respectively in the relevant category.
(vii) Movement of Restructured standard advances (Sr. No. 4 in the Disclosure Format) out of the category into
normal standard advances will be indicated by a (-) sign in the column "Standard".
(viii) Downgradation from one category to another would be indicated by (-) ve and (+) ve sign in the relevant
categories.
(ix) Upgradation, downgradation and write-offs are from their existing asset classifications.
(x) All disclosures are on the basis of current asset classification and not 'pre-restructuring' asset classification.
(xi) Additional/fresh sanctions made to an existing restructured account can be shown under Sr. No. 2 ‘Fresh
Restructuring during the year’ with a footnote stating that the figures under Sr. No.2 include Rs. xxx crore of
fresh/additional sanction (number of accounts and provision thereto also) to existing restructured accounts. Similarly,
reductions in the quantity of restructured accounts can be shown under Sr.No.6 ‘write-offs of restructured accounts
during the year’ with a footnote stating that that it includes Rs. xxx crore (no. of accounts and provision thereto also)
of reduction from existing restructured accounts by way of sale / recovery.
(xii) Closing balance as on March 31st of a FY should tally arithmetically with opening balance as on April 1st of the
FY + Fresh Restructuring during the year including additional /fresh sanctions to existing restructured accounts +
Adjustments for movement across asset categories – Restructured standard advances which cease to attract higher
risk weight and/or provision – reductions due to write-offs/sale/recovery, etc. However, if due to some unforeseen/
any other reason, arithmetical accuracy is not achieved, then the difference should be reconciled and explained by
way of a foot-note.
3.4.3 Details of financial assets sold to Securitisation / Reconstruction Company for
Asset Reconstruction
A. Details of Sales
Particulars (Amount in Rs. crore)
Current year Previous Year
(i) No. of accounts
(ii) Aggregate value (net of provisions) of accounts sold to SC/RC
(iii) Aggregate consideration
(iv) Additional consideration realized in respect of accounts
transferred in earlier years
(v) Aggregate gain/loss over net book value
With a view to incentivising banks to recover appropriate value in respect of their NPAs
promptly, banks can reverse the excess provision on sale of NPA if the sale is for a value
higher than the net book value (NBV) to its profit and loss account in the year the amounts
are received. The quantum of excess provision reversed to the profit and loss account on
account of sale of NPAs should be disclosed in the financial statements of the bank under
‘Notes to Accounts’.
As an incentive for early sale of NPAs, banks can spread over any shortfall, if the sale value
is lower than the NBV, over a period of two years. This facility of spreading over the shortfall
would however be available for NPAs sold up to March 31, 2018 and will be subject to
necessary disclosures in the ‘Notes to Account’.
B. Details of Book Value of Investments in Security Receipts

The details of the book value of investments in security receipts may be disclosed as under:
(i) Backed by NPAs sold by the bank as underlying
(ii) Backed by NPAs sold by other banks / financial institutions / non
banking financial companies as underlying
Total
3.4.4 Details of non-performing financial assets purchased/sold
Banks which purchase / sell non performing financial assets from / to other banks shall be
required to make the following disclosures in the ‘Notes to Accounts’ to their Balance sheets:
A. Details of non-performing financial assets purchased: (Amount in Rs. crore)

1. (a) No. of accounts purchased during the year
(b) Aggregate outstanding
2. (a) Of these, number of accounts restructured during the year
(b) Aggregate outstanding
B. Details of non-performing financial assets sold:
1. No. of accounts sold
2. Aggregate outstanding
3. Aggregate consideration received
3.4.5 Provisions on Standard Assets

Provisions towards Standard Assets
Note: Provisions towards Standard Assets need not be netted from gross advances but
shown separately as 'Provisions against Standard Assets', under 'Other Liabilities and
Provisions - Others' in Schedule No. 5 of the balance sheet.
3.5. Business Ratios
Particulars Current year Previous Year
(i) Interest Income as a percentage to Working Funds $
(ii) Non-interest income as a percentage to Working Funds
(iii) Operating Profit as a percentage to Working Funds $
(iv) Return on Assets@
(v) Business (Deposits plus advances) per employee # (Rs.in
crore)
(vi) Profit per employee (Rs. in crore)
$ Working funds to be reckoned as average of total assets (excluding accumulated losses, if any)
as reported to Reserve Bank of India in Form X under Section 27 of the Banking Regulation Act,
1949, during the 12 months of the financial year.
@ 'Return on Assets would be with reference to average working funds (i.e. total of assets
excluding accumulated losses, if any)
# For the purpose of computation of business per employee (deposits plus advances) inter bank
deposits may be excluded.

3.6 Asset Liability Management Maturity pattern of certain items of assets and liabilities
(Amount in Rs. Crore)
Day 1 2 to 8 to 15 to 29 days to Over 3 Over 6 Over 1 Over 3 Over Total
7 days 14 days 28 days 3 Month month Month year & years & 5 years
& up to & up to up to up to
6 month 1 year 3 years 5 years
Deposits
Advances
Investments
Borrowings
Foreign
Currency
assets
Foreign
Currency
liabilities
3.7 Exposures
3.7.1 Exposure to Real Estate Sector (Amount in Rs. crore)
a) Direct exposure
(i) Residential Mortgages –
Lending fully secured by mortgages on residential property that is or will be
occupied by the borrower or that is rented; (Individual housing loans eligible for
inclusion in priority sector advances may be shown separately)
(ii) Commercial Real Estate –
Lending secured by mortgages on commercial real estates (office buildings,
retail space, multi-purpose commercial premises, multi-family residential
buildings, multi-tenanted commercial premises, industrial or warehouse space,
hotels, land acquisition, development and construction, etc.). Exposure would
also include non-fund based (NFB) limits;
(iii) Investments in Mortgage Backed Securities (MBS) and other
securitised exposures –
a. Residential,
b. Commercial Real Estate.
b) Indirect Exposure
Fund based and non-fund based exposures on National Housing Bank (NHB) and
Housing Finance Companies (HFCs).
Total Exposure to Real Estate Sector
3.7.2 Exposure to Capital Market
(i) direct investment in equity shares, convertible bonds, convertible
debentures and units of equity-oriented mutual funds the corpus of which
is not exclusively invested in corporate debt;
(ii) advances against shares/bonds/ debentures or other securities or on clean
basis to individuals for investment in shares (including IPOs/ESOPs),
convertible bonds, convertible debentures, and units of equity-oriented
mutual funds;
(iii) advances for any other purposes where shares or convertible bonds or
convertible debentures or units of equity oriented mutual funds are taken
as primary security;
(iv) advances for any other purposes to the extent secured by the collateral
security of shares or convertible bonds or convertible debentures or units
of equity oriented mutual funds i.e. where the primary security other than
shares/convertible bonds/convertible debentures/units of equity oriented
mutual funds `does not fully cover the advances;
(v) secured and unsecured advances to stockbrokers and guarantees issued
on behalf of stockbrokers and market makers;
(vi) loans sanctioned to corporates against the security of shares /
bonds/debentures or other securities or on clean basis for meeting
promoter’s contribution to the equity of new companies in anticipation of
raising resources;
(vii) bridge loans to companies against expected equity flows/issues;
(viii) underwriting commitments taken up by the banks in respect of primary
issue of shares or convertible bonds or convertible debentures or units of
equity oriented mutual funds;
(ix) financing to stockbrokers for margin trading;
(x) all exposures to Venture Capital Funds (both registered and unregistered)
Total Exposure to Capital Market
For restructuring of dues in respect of listed companies, lenders may be abinitio compensated for their loss / sacrifice
(diminution in fair value of account in net present value terms) by way of issuance of equities of the company upfront,
subject to the extant regulations and statutory requirements. If such acquisition of equity shares results in exceeding
the extant regulatory Capital Market Exposure (CME) limit, the same should be disclosed in the Notes to Accounts in
the Annual Financial Statements. Similarly, banks should separately disclose details of conversion of debt into equity
as part of a strategic debt restructuring which are exempt from CME limits.

3.7.3 Risk Category wise (Amount in Rs. crore)
Country Exposure
As at 31-3-2018 As at 31-3-2017
Risk Category* Exposure (net) Provision held Exposure (net) Provision held
Insignificant
Low
Moderate
High
Very High
Restricted
Off-credit
Total
*Till such time, as banks move over to internal rating systems, banks may use the seven category classification followed
by Export Credit Guarantee Corporation of India Ltd. (ECGC) for the purpose of classification and making provisions for
country risk exposures. ECGC shall provide to banks, on request, quarterly updates of their country classifications and
shall also inform all banks in case of any sudden major changes in country classification in the interim period.
3.7.4 Details of Single Borrower Limit (SGL)/ Group Borrower Limit (GBL) exceeded by
the bank.
Appropriate Note in respect of the exposures where the bank had exceeded the
prudential exposure limits during the year. The sanctioned limit or entire outstanding,
whichever is higher, shall be reckoned for arriving at exposure limit and for disclosure
purpose.
3.7.5 Unsecured Advances
In order to enhance transparency and ensure correct reflection of the unsecured
advances in Schedule 9 of the banks’ balance sheet, it is advised as under:
a) the rights, licenses, authorisations, etc., charged as collateral in respect of projects
(including infrastructure projects) financed by the bank, should not be reckoned as
tangible security and such advances shall be reckoned as unsecured.
b) Disclose the total amount of advances for which intangible securities such as charge
over the rights, licenses, authority, etc. have been taken as also the estimated value of
such intangible collateral.
3.8 Disclosure of Penalties imposed by RBI
At present, Reserve Bank is empowered to impose penalties on a commercial bank under the
provision of Section 46 (4) of the Banking Regulation Act, 1949, for contraventions of any of the
provisions of the Act or non-compliance with any other requirements of the Banking Regulation
Act, 1949; order, rule or condition specified by Reserve Bank under the Act. Consistent with the
international best practices in disclosure of penalties imposed by the regulator, placing the details
of the levy of penalty on a bank in public domain will be in the interests of the investors and
depositors. Further, strictures or directions on the basis of inspection reports or other adverse
findings should also be placed in the public domain. The penalty should also be disclosed in the
"Notes to Accounts" to the Balance Sheet.
4. Disclosure Requirements as per Accounting Standards where RBI has issued guidelines
4.1 Accounting Standard 5 – Net Profit or Loss for the period, prior period items and
changes in accounting policies.
The impact of prior period items on the current year’s profit and loss, such disclosures,
wherever warranted.
4.2 Accounting Standard 9 – Revenue Recognition
In addition to the disclosures required by Accounting Standard 1 on ‘Disclosure of Accounting
Policies’ (AS 1), the bank should also disclose the circumstances in which revenue recognition has
been postponed pending the resolution of significant uncertainties.
4.3 Accounting Standard 15 – Employee Benefits
Disclosure requirements prescribed under AS 15 (revised), ‘Employees Benefits’ issued by ICAI
to be followed.
4.4 Accounting Standard 17 – Segment Reporting
While complying with the above Accounting Standard, banks are required to adopt the following:
a) The business segment should ordinarily be considered as the primary reporting format and
geographical segment would be the secondary reporting format.
b)The business segments will be ‘Treasury’, ‘Corporate/Wholesale Banking’, ‘Retail
Banking’ and ‘Other banking operations’
c) ‘Domestic’ and ‘International’ segments will be the geographic segments for disclosure.
d) Banks may adopt their own methods, on a reasonable and consistent basis, for allocation
of expenditure among the segments.

Accounting Standard 17 - Format for disclosure under segment reporting
Part A: Business segments (Amount in Rs. crore)
Business Treasury Corporate/ Wholesale Retail Banking Other Banking Total
Segments Banking Operations
Particulars Current Previous Current Previous Current Previous Current Previous Current Previous
Year Year Year Year Year Year Year year Year Year
Result
Unallocated
expenses
Operating
profit
Income taxes
Extraordinary
profit/ loss
Net profit
Other Information:
Segment
assets
Unallocated
assets
Total assets
Segment
liabilities
Unallocated
liabilities
Total liabilities
Part B: Geographic segments (Amount in Rs. crore)
Domestic International Total
Current Year Previous Year Current Year Previous Year Current Year Previous Year
Revenue
Assets
4.5 Accounting Standard 18 – Related Party Disclosure
This Standard is applied in reporting related party relationships and transactions between a
reporting enterprise and its related parties. The illustrative disclosure format recommended by the
ICAI as a part of General Clarification (GC) 2/2002 has been suitably modified to suit banks. The
illustrative format of disclosure by banks for the AS 18 is furnished below:
Accounting Standard 18 - Format for Related Party Disclosures
The manner of disclosures required by paragraphs 23 and 26 of AS 18 is illustrated below. It may
be noted that the format is merely illustrative and is not exhaustive.
(Amount in Rs. crore)
Items/Related Party Parent Subsidiaries Associates/ Key Relatives of Key Total
(as per Joint Management Management
ownership ventures Personnel @ Personnel
or control)
Borrowings #
Deposit#
Placement of deposits #
Advances #
Investments#
Non-funded commitments#
Leasing/HP arrangements availed
#
Leasing/HP arrangements
provided #
Purchase of fixed assets
Sale of fixed assets
Interest paid
Interest received
Rendering of services *
Receiving of services *
Management contracts*
Note: Where there is only one entity in any category of related party, banks need not disclose any details pertaining to that
related party other than the relationship with that related party [c.f. Para 8.3.1 of the Guidelines]
* Contract services etc. and not services like remittance facilities, locker facilities etc.
@ Whole time directors of the Board and CEOs of the branches of foreign banks in India.
# The outstanding at the year-end and the maximum during the year are to be disclosed.

Illustrative disclosure of names of the related parties and their relationship with the bank
1. Parent A Ltd
2. Subsidiaries B Ltd and C Ltd
4. Associates P Ltd, Q Ltd and R Ltd
5. Jointly controlled entity L Ltd
6. Key Management Personnel Mr.M and Mr.N
7. Relatives of Key Management Personnel Mr.D and Mr.E
4.6 Accounting Standard 21 – Consolidated Financial Statements (CFS)
A parent company, presenting the CFS, should consolidate the financial statements of all subsidiaries -
domestic as well as foreign, except those specifically permitted to be excluded under the AS-21. The
reasons for not consolidating a subsidiary should be disclosed in the CFS. The responsibility of determining
whether a particular entity should be included or not for consolidation would be that of the Management of
the parent entity. In case, its Statutory Auditors are of the opinion that an entity, which ought to have been
consolidated, has been omitted, they should incorporate their comments in this regard in the ';Auditors
Report';.
4.7 Accounting Standard 22 – Accounting for Taxes on Income
DTL created by debit to opening balance of Revenue Reserves on the first day of application of the Accounting
Standards 22 or to Profit and Loss account for the current year should be included under item (vi) ‘others
(including provisions)’ of Schedule 5 - ‘Other Liabilities and Provisions’ in the balance sheet. The balance in
DTL account will not be eligible for inclusion in Tier I or Tier II capital for capital adequacy purpose as it is
not an eligible item of capital.
 DTA created by credit to opening balance of Revenue Reserves on the first day of application of
Accounting Standards 22 or to Profit and Loss account for the current year should be included under
item (vi) ‘others’ of Schedule 11 ‘Other Assets’ in the balance sheet.
 The DTA computed as under should be deducted from Tier I capital:
i) DTA associated with accumulated losses; and
ii) The DTA (excluding DTA associated with accumulated losses), net of DTL. Where DTL is in
excess of the DTA (excluding DTA associated with ac cumulated losses), the excess shall neither be
adjusted against item (i) nor added to Tier I capital.
Regarding creation of DTL on Special Reserve created by banks under Section 36(1)(viii) of the
Income Tax Act, 1961 (hereinafter referred to as Special Reserve) banks are advised that, as a
matter of prudence, DTL should be created on such Special Reserve.
4.8 Accounting Standard 23 – Accounting for Investments in Associates in

Consolidated Financial Statements
This Accounting Standard sets out principles and procedures for recognising, in the
consolidated financial statements, the effects of the investments in associates on the financial
position and operating results of a group. A bank may acquire more than 20% of voting power
in the borrower entity in satisfaction of its advances and it may be able to demonstrate that it
does not have the power to exercise significant influence since the rights exercised by it are
protective in nature and not participative. In such a circumstance, such investment may not
be treated as investment in associate under this Accounting Standard. Hence the test should
not be merely the proportion of investment but the intention to acquire the power to exercise
significant influence.
4.9 Accounting Standard 24 – Discontinuing Operations
Merger/ closure of branches of banks by transferring the assets/ liabilities to the other
branches of the same bank may not be deemed as a discontinuing operation and hence this
Accounting Standard will not be applicable to merger / closure of branches of banks by
transferring the assets/ liabilities to the other branches of the same bank.
Disclosures would be required under the Standard only when:
a) discontinuing of the operation has resulted in shedding of liability and realisation of the
assets by the bank or decision to discontinue an operation which will have the above
effect has been finalised by the bank and
b) the discontinued operation is substantial in its entirety.
4.10Accounting Standard 25 – Interim Financial Reporting
The half yearly review prescribed by RBI for public sector banks, in consultation with SEBI,
vide circular DBS. ARS. No. BC 13/ 08.91.001/ 2000-01 dated 17th May 2001 is extended to
all banks (both listed and unlisted) with a view to ensure uniformity in disclosures. Banks may
also refer to circulars DBS.ARS.No.BC.4/08.91.001/2001-02 dated October 25, 2001 and
DBS.ARS.No.BC.17/08.91.001/2002-03 dated June 5, 2003 and adopt the format
prescribed by the RBI for the purpose.
4.11Other Accounting Standards
Banks are required to comply with the disclosure norms stipulated under the various
Accounting Standards issued by the Institute of Chartered Accountants of India.

5. Additional Disclosures
5.1 Provisions and Contingencies (Amount in Rs. crore)
Break up of ‘Provisions and Contingencies’ shown under the head Current Year Previous Year
Expenditure in Profit and Loss Account
Provisions for depreciation on Investment
Provision towards NPA
Provision towards Standard Asset
Provision made towards Income tax
Other Provisions and Contingencies (with details)
Total
5.2 Floating Provisions
Particulars
(a) Opening balance
(b) provisions made during the year
(c) Amount of draw down made during the year@
(d) Closing balance
@ purpose of draw down
5.3 Draw Down from Reserves

Suitable disclosures regarding any draw down of reserves
5.4 Disclosure of complaints/awards passed by Banking Ombudsman
Complaints/Awards No.
A. Customer Complaints
(a) pending at the beginning of the year
(b) received during the year
(c) redressed during the year
(d) pending at the end of the year
B. Awards passed by the Banking Ombudsman
(a) Awards unimplemented at the beginning of the year
(b) Awards passed by the Banking Ombudsmen during the year
(c) Awards implemented during the year
(d) Awards unimplemented at the end of the year
It is clarified that banks should include all customer complaints pertaining to Automated Teller
Machine (ATM) cards issued by them in the disclosure format specified above. Where the card
issuing bank can specifically attribute ATM related customer complaints to the acquiring bank, the
same may be clarified by way of a note after including the same in the total number of complaints
received.
5.5 Disclosure of Letters of Comfort (LoCs) issued by banks
Full particulars of all the Letters of Comfort (LoCs) during the year, including their assessed financial
impact and outstanding assessed cumulative financial obligations under the LoCs issued in the
past.
5.6 Provisioning Coverage Ratio (PCR)
The PCR (ratio of provisioning to gross non-performing assets) – as at close of business for the
current year and previous year to be disclosed in the prescribed format.
5.7 Insurance Business
The details of fees/brokerage earned in respect of insurance broking agency and bancassurance
business undertaken.
5.8 Concentration of Deposits, Advances, Exposures and NPAs
5.8.1 Concentration of Deposits Amount in Rs. crore
Total deposits of twenty largest depositors
Percentage of deposits of twenty largest depositors to total
deposits of the bank
5.8.2 Concentration of Advances*
Total Advances to twenty largest borrowers
Percentage of Advances to twenty largest borrowers to Total Advances of the

bank
5.8.3 Concentration of Exposures**

Total Exposure to twenty largest borrowers/customers

Percentage of Exposures to twenty largest borrowers/customers to Total Exposure of
the bank on borrowers/customers
5.8.4 Concentration of NPAs

Total Exposure to top four NPA accounts
* Advances should be computed as per definition of Credit Exposure including derivatives
furnished in the Master Circular on Exposure Norms.
** Exposures should be computed based on credit and investment exposure as prescribed in the
Master Circular on Exposure Norms.
5.9 Sector-wise advances
Sl. Sector* Current year Previous year

No.
Outstanding Total Gross Percentage of Outstanding Total Gross Percentage
Advances NPAs Gross NPAs to Advances NPAs of Gross
Total Advances NPAs to Total
in that sector Advances in
that sector
A Priority Sector
1 Agriculture and
allied activities
2 Advances to
industries sector
eligible as priority
sector lending
3 Services
4 Personal loans
Sub-total (A)
B Non Priority
Sector
1 Agriculture and
allied activities
2 Industry
3 Services
4 Personal loans
Sub-total (B)
Total (A+B)
*Banks may also disclose in the format above, sub sectors where the outstanding advances exceeds 10 percent of the
outstanding total advances to that sector. For instance, if a bank’s outstanding advances to the mining industry exceed 10
percent of the outstanding total advances to ‘Industry’ sector it should disclose details of its outstanding advances to mining
separately in the format above under the ‘Industry’ sector.
(Amount in ` crore)
5.10 Movement of NPAs
Gross NPAs* as on 1st April 2017 (Opening Balance)
Additions (Fresh NPAs) during the year
Sub-total (A)
Less:
(i) Upgradations
(ii) Recoveries (excluding recoveries made from upgraded
accounts)
**
(iii) Technical/Prudential Write-offs
(iii) Write-offs other than those under (iii) above
Sub-total (B)

Gross NPAs as on 31st March 2018 (closing balance) (A-B)
Further, banks should disclose the stock of technical write-offs and the recoveries made thereon as per
the format below:
Particulars Current year Previous year

Opening balance of Technical / Prudential written-off accounts
as at April 1
Add : Technical / Prudential write-offs during the year
Sub-total (A)
Less : Recoveries made from previously technical / prudential

written-off accounts during the year (B)
Closing balance as at March 31 (A-B)
*Gross NPAs as per item 2 of Annex to DBOD Circular DBOD Circular DBOD.BP.BC.No.46/21.04.048 /2009-10
dated September 24, 2009
** Technical or prudential write-off is the amount of non-performing loans which are outstanding in the books of
the branches, but have been written-off (fully or partially) at Head Office level. Amount of Technical write-off
should be certified by statutory auditors. (Defined in our circular reference DBOD.No.BP.BC.64/21.04.048/2009-
10 dated December 1, 2009 on Provisioning Coverage for Advances)
Further, banks should disclose the stock of technical write offs and the recoveries made thereon as per the format
below:
(Amount in ` crore)
Opening balance of Technical / Prudential written off accounts
as at April 1
Add : Technical / Prudential write offs during the year

Sub total (A)
Less : Recoveries made from previously technical / prudential
written off accounts during the year (B)
Closing balance as at March 31 (A-B)
5.11 Overseas Assets, NPAs and Revenue

Particulars Amount in Rs. Crore
Total Assets
Total NPAs
Total Revenue
5.12 Off-balance Sheet SPVs sponsored (required to be consolidated as per accounting

norms)
Name of the SPV sponsored
Domestic Overseas
5.13 Unamortised Pension and Gratuity Liabilities

Appropriate disclosures of the accounting policy followed in regard to amortization of pension and
gratuity expenditure may be made in the Notes to Accounts to the financial statements.
5.14 Disclosures on Remuneration

In terms of Guidelines on Compensations of Whole Time Directors/Chief Executive Officers/Risk
Takers and Control Function Staff etc., private sector banks and foreign banks (to the extent
applicable), are advised to disclose the following information in their notes to accounts.

Qualitative (a) Information relating to the composition and mandate of the Remuneration
disclosures Committee.
(b) Information relating to the design and structure of remuneration processes and
the key features and objectives of remuneration policy.
(c) Description of the ways in which current and future risks are taken into account
in the remuneration processes. It should include the nature and type of the key
measures used to take account of these risks.
(d) Description of the ways in which the bank seeks to link performance during a
performance measurement period with levels of remuneration.
(e) A discussion of the bank’s policy on deferral and vesting of variable
remuneration and a discussion of the bank’s policy and criteria for adjusting
deferred remuneration before vesting and after vesting.
(f) Description of the different forms of variable remuneration (i.e. cash, shares,
ESOPs and other forms) that the bank utilizes and the rationale for using these
different forms.
Current Previous
Year Year
Quantitative (g) Number of meetings held by the Remuneration
disclosures Committee during the financial year and remuneration
paid to its members.
(The quantitative (h) (i) Number of employees having received a variable
disclosures remuneration award during the financial year.
should only cover (ii) Number and total amount of sign-on awards made
Whole Time during the financial year.
Directors / Chief (iii) Details of guaranteed bonus, if any, paid as joining /
Executive Officer/ sign on bonus
Other Risk (iv) Details of severance pay, in addition to accrued
Takers) benefits, if any.
(i) (i) Total amount of outstanding deferred remuneration,
split into cash, shares and share-linked instruments and
other forms.
(ii) Total amount of deferred remuneration paid out in the
financial year.
(j) Breakdown of amount of remuneration awards for the
financial year to show fixed and variable, deferred and
non-deferred.
(k) (i) Total amount of outstanding deferred remuneration
and retained remuneration exposed to ex post explicit
and / or implicit adjustments.
(ii) Total amount of reductions during the financial year
due to ex- post explicit adjustments.
(iii) Total amount of reductions during the financial year
due to ex- post implicit adjustments.
In terms of the Guidelines on Compensation of Non-executive Directors (Except Part-time

Chairman) of Private Sector Banks, private sector banks are also required to make
disclosure on remuneration paid to the directors on an annual basis at the minimum, in their
Annual Financial Statements.
5.15 Disclosures relating to Securitisation

The Notes to Accounts of the originating banks should indicate the outstanding
amount of securitised assets as per books of the SPVs sponsored by the bank and
total amount of exposures retained by the bank as on the date of balance sheet to
comply with the Minimum Retention Requirements (MRR). These figures should be
based on the information duly certified by the SPV's auditors obtained by the
originating bank from the SPV. These disclosures should be made in the format given
below.
(Amount in Rs. Crore / No.)

S. Current Year Previous Year
Particulars
No.
1. No of SPVs sponsored by the bank for securitisation transactions*
2. Total amount of securitised assets as per books of the SPVs sponsored by
the bank
3. Total amount of exposures retained by the bank to comply with MRR as on
the date of balance sheet
a) Off-balance sheet exposures
First loss
Others
b) On-balance sheet exposures
First loss
Others
4 Amount of exposures to securitisation transactions other than MRR
a) Off-balance sheet exposures
i) Exposure to own securitizations
First loss
Loss
ii) Exposure to third party securitizations
First loss
Others
b) On-balance sheet exposures
i) Exposure to own securitizations
First loss
Others
ii) Exposure to third party securitizations
First loss
Others
*Only the SPVs relating to outstanding securitisation transactions may be reported here
5.16 Swaps Credit Default
Banks using a proprietary model for pricing CDS, shall disclose both the proprietary model price and the standard model
price in terms of extant guidelines in the Notes to the Accounts and should also include an explanation of the rationale
behind using a particular model over another.
5.17 Intra-Group Exposures
With the developments of financial markets in India, banks have increasingly expanded their presence in permitted
financial activities through entities that are owned by them fully or partly. As a result, banks' exposure to the group
entities has increased and may rise further going forward. In order to ensure transparency in their dealings with group
entities, banks should make the following disclosures for the current year with comparatives for the previous year
a. Total amount of intra-group exposures
b. Total amount of top-20 intra-group exposures
c. Percentage of intra-group exposures to total exposure of the bank on borrowers / customers
d. Details of breach of limits on intra-group exposures and regulatory action thereon, if any.
5.18 Transfers to Depositor Education and Awareness Fund (DEAF)

Unclaimed liabilities where amount due has been transferred to DEAF may be reflected as "Contingent Liability - Others,
items for which the bank is contingently liable" under Schedule 12 of the annual financial statements. Banks are also
advised to disclose the amounts transferred to DEAF under the notes to accounts as per the format given below.
(Amount in ` crore)
Opening balance of amounts transferred to DEAF
Add : Amounts transferred to DEAF during the year
Less : Amounts reimbursed by DEAF towards claims
Closing balance of amounts transferred to DEAF
5.19 Unhedged Foreign Currency Exposure

Banks should disclose their policies to manage currency induced credit risk as a part of financial
statements certified by statutory auditors. In addition, banks should also disclose the incremental
provisioning and capital held by them towards this risk.
6. Liquidity Coverage Ratio (LCR)

6.1 Disclosure format
Banks are required to disclose information on their Liquidity Coverage Ratio (LCR) in their annual financial statements under
Notes to Accounts, starting with the financial year ending March 31, 2018, for which the LCR related information needs to be
furnished only for the quarter ending March 31, 2018. However, in subsequent annual financial statements, the disclosure
should cover all the four quarters of the relevant financial year. The disclosure format is given below.
LCR Disclosure Tamplate
(Amount in ` crore)
Total Total Total Total
Unweighted*Value Weighted**Value Unweighted*Value Weighted**Value
(average) (average) (average) (average)
High Quality Liquid Assets
1 Total High Quality Liquid

Assets (HQLA)
Cash Outflows
2 Retail deposits and deposits
from small business
customers, of which:
(i) Stable deposits
(ii) Less stable deposits

3 Unsecured wholesale
funding, of which:
(i) Operational deposits (all
counterparties)
(ii) Non-operational deposits
(all counterparties)
(iii) Unsecured debt
4 Secured wholesale funding
5 Additional requirements, of
which
(i) Outflows related to
derivative exposures and
other collateral
requirements
(ii) Outflows related to loss of
funding on debt products
(iii) Credit and liquidity facilities
6 Other contractual funding

obligations
7 Other contingent funding
obligations
8 Total Cash Outflows
Cash Inflows
9 Secured lending (e.g.
reverse repos)
10 Inflows from fully performing
exposures
11 Other cash inflows
12 Total Cash Inflows
Total Total Adjusted
Adjusted***Value Value
21 TOTAL HQLA

22 Total Net Cash Outflows
23 Liquidity Coverage Ratio (%)
Note – Data to be entered only in blank and light grey cells
Data must be presented as simple averages of monthly observations over the previous quarter (i.e. the
average is calculated over a period of 90 days). However, with effect from the financial year ending March 31,
2018, the simple average should be calculated on daily observations. For most data items, both unweighted
and weighted values of the LCR components must be disclosed as given in the disclosure format. The
unweighted value of inflows and outflows is to be calculated as the outstanding balances of various categories
or types of liabilities, off-balance sheet items or contractual receivables. The “weighted” value of HQLA is to be
calculated as the value after haircuts are applied. The “weighted” value for inflows and outflows is to be
calculated as the value after the inflow and outflow rates are applied. Total HQLA and total net cash outflows
must be disclosed as the adjusted value, where the “adjusted” value of HQLA is the value of total HQLA after
the application of both haircuts and any applicable caps on Level 2B and Level 2 assets as indicated in this
Framework. The adjusted value of net cash outflows is to be calculated after the cap on inflows is applied, if
applicable.
* Unweighted values must be calculated as outstanding balances maturing or callable within 30 days (for
inflows and outflows) except where otherwise mentioned in the circular and LCR template.
** Weighted values must be calculated after the application of respective haircuts (for HQLA) or inflow and
outflow rates (for inflows and outflows).
*** Adjusted values must be calculated after the application of both (i) haircuts and inflow and outflow rates
and (ii) any applicable caps (i.e. cap on Level 2B and Level 2 assets for HQLA and cap on inflows).
6.2 Qualitative disclosure around LCR

In addition to the disclosures required by the format given above, banks should provide sufficient qualitative
discussion (in their annual financial statements under Notes to Accounts) around the LCR to facilitate
understanding of the results and data provided. For example, where significant to the LCR, banks could
discuss:
(a) the main drivers of their LCR results and the evolution of the contribution of inputs to the LCR’s calculation
over time;
(b) intra-period changes as well as changes over time;
(c) the composition of HQLA;
(d) concentration of funding sources;
(e) derivative exposures and potential collateral calls;
(f) currency mismatch in the LCR;
(g) a description of the degree of centralisation of liquidity management and interaction between the group’s
units; and
(h) other inflows and outflows in the LCR calculation that are not captured in the LCR common template but
which the institution considers to be relevant for its liquidity profile.
Additional Disclosures required in respect of Stressed Assets

(RBI Circulars DBR.No.BP.BC.103/21.04.132/2015-16 and DBR.No.BP.BC.33-34/21/04.132/ 2016-17
dated 13-6-2016 and 10-11-2016)
1. Disclosures on Flexible Structuring of Existing Loans

Period No. of Amount of loans taken up for Exposure weighted average
Borrowers Flexible restructuring duration of loans taken up for
taken up for flexible restructuring
Flexible Classified as Classified as Before applying After
restructuring Standard NPA flexible applying
restructuring flexible
restructuring
Previous
financial year
Current
financial
year(From April
to__________)
2. Disclosures on Strategic Debt Restructuring Scheme (accounts which are currently under the
stand-still period)
No. of Amount outstanding as at Amount outstanding as at the reporting date with respect

accounts the reporting date to accounts where conversion of debt to equity
where SDR Classified as Classified is pending has taken place
has been Standard as NPA Classified Classified Classified as Classified
invoked as as NPA Standard as NPA
Standard
3. Disclosures on Change in Ownership outside SDR Scheme (accounts which are currently
under the stand-still period)

No. of Amount outstanding Amount outstanding Amount outstanding Amount outstanding
Accounts as on the reporting as on the reporting as on the reporting as on the reporting
where the date date with respect to date with respect to date with respect to
Bank has accounts where accounts where accounts where
decided to conversion of debt to conversion of debt to change in ownership
effect equity/invocation of equity/invocation of is envisaged by
change in pledge of equity pledge of equity issuance of fresh
ownership shares is pending shares has taken shares or sale of
place owners’ equity
Classified Classified Classified Classified Classified Classified Classified Classified
as as NPA as as NPA as as NPA as as NPA
Standard Standard Standard Standard
4. Disclosures on Change in Ownership of Projects Under Implementation (accounts which are

currently under the stand-still period)

No. of project loan Amount outstanding as on the reporting date
accounts where banks have Classified as Standard Classified as Standard Classified as NPA
decided to effect change in restructured
ownership
5. Disclosure on the Scheme for sustainable restructuring of stressed assets (S4A), as

on__________
No. of Accounts Aggregate Amount Outstanding Provision held
where S4A has been amount In Part A In Part B
applied outstanding
Classified as XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXX
Standard
Classified as NPA XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXX
Disclosures required in respect of Stressed Assets – Revised Framework

As per RBI Circular No. DBR.No.BP.BC.101/21.04.048/2017-18 dated 12.02.2018, Banks shall make
appropriate disclosures in their financial statements, under ‘Notes on Accounts’, relating to
resolution plans implemented (based on guidelines to be issued separately).


L
TEXT OF NEGATIVE ASSURANCE CERTIFICATE RECOMMENDED TO BE

ISSUED ON THE GHOSH AND JILANI COMMITTEE RECOMMENDATIONS
"We have in the course of audit of____________Branch of ______________Bank,

and based on test check procedures adopted in respect of the accounts for the
year 2017-18, broadly reviewed the internal control procedures of the Bank
considered relevant for audit, as also arising out of the recommendations of the
Ghosh and Jilani Committees, and have relied upon the information, explanations
and management responses /assertions stated against each item in the
statement/format prepared (*Certificate Nos.___ and __);and, except as otherwise
stated in our main report and Long Form Audit Report dated______, and further
subject to our inability to verify/ comment on matters/issues/assertions, that
required our physical presence at the Branch prior to our appointment, we have
not come across anything that causes us to believe that there are any significant
/material misstatements/ assertions made, as would have effect on our opinion on
the financial statements under audit."
For_________________________
Firm Reg. No._____________
(Name of the Member)

(Proprietor/Partner)
Membership No……..
* in case the responses are given in the form of Certificates.
(Reference may be made to RBI Circular DBS.CO.PPD.BC.No. 10/11.01.005/2015-16

dated 28.4.2016 to the effect that the compliance to the Jilani Committee
recommendations need not to be reported to the Audit Committee of the Board of
Directors. However, banks are advised to ensure that:
i) Compliance to these recommendations are complete and sustained,
ii) These recommendations are appropriately factored in the internal inspection /
audit processes of banks and duly documented in their manual/instructions, etc.
Note:
@
The Council , with a view to bring about uniformity in the manner of signing of certificates,
requires the members of the ICAI to include (in addition to any other requirements in this regard
prescribed by the relevant law or regulation under which the certificate is being issued) the
following details on the certificates issued by them:
 Name of the CA firm*
 Firm Registration Number (FRN)*
 Name of the member
 Designation (Partner/Proprietor)
 Membership Number
@ th
( Council Resolution - meeting held on 17-18 January 2016)

M
BANK AUDIT - Important provisions of the Banking Regulation Act, 1949
Section Contents
5 (b) “Banking” defined as accepting for the purpose of lending or investment, of deposits of money
from the public, repayable on demand or 'otherwise and withdrawal by cheques, drafts, order or
otherwise.
6 Forms of business, in which banking companies may engage
(a) the borrowing, raising, or taking up of money; the lending or advancing of money either
upon or without security; the drawing, making, accepting, discounting, buying, selling,
collecting and dealing in bills of exchange, hundies, promissory notes, coupons, drafts, bills
of lading, railway receipts, warrants, debentures, certificates, scripts and other instruments,
and securities whether transferable or negotiable or not; the granting and issuing of letters
of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion
and specie; the buying and selling, of foreign exchange including foreign bank notes; the
acquiring holding, issuing on commission, underwriting and dealing in stock, funds, shares
debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the
purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents
or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips
or valuables on deposit or for safe custody or otherwise; the providing of safe deposit
vaults; the collecting and transmitting of money and securities;
(b) acting as agents for any Government or local authority or any other person or persons; the
carrying on of agency business of any description including the clearing and forwarding of
goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of
customers, but excluding the business of a 1[managing agent or secretary and treasurer] of
a company;
(c) contracting for public and private loans and negotiating and issuing the same;
(d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying
out of any issue, public or private, of State, municipal or other loans or of shares, stock,
debentures, or debenture stock of any company, corporation or association and the lending
of money for the purpose of any such issue;
(e) carrying on and transacting every kind of guarantee and indemnity business;
(f) managing, selling and realizing any property which may come into the possession of the
company in satisfaction or part satisfaction of any of its claims;
(g ) acquiring and holding and generally dealing with any property or any right, title or interest
in any such property which may form the security or part of the security for any loans or
advances or which may be connected with any such security;
(h) undertaking and executing trusts;
(i) undertaking the administration of estates as executor, trustee or otherwise;
(j) establishing and supporting or aiding in the establishment and support of association.,
institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees
of the company or the dependents or connections of such persons; granting pensions and
allowances and making payments towards insurance; subscribing to or guaranteeing
moneys for charitable or benevolent objects or for any exhibition or for any public, general
or useful object;
(k) the acquisition, construction, maintenance and alteration of any building or works necessary
or convenient for the purposes of the company;
(l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or
turning into account or otherwise dealing with all or any part of the property and rights of
the company;
(m) acquiring and undertaking the whole or any part of the business of any person or company,
when such business is of nature enumerated or described in this sub-section;
(n) doing all such other things as are incidental or conducive to the promotion or advancement of
the business of the company;
(o) any other forms of business which the Central Government may by notification in the
Official Gazette, specify as a form of business in which it is lawful for a banking company to
engage.
8 Prohibition of trading
Notwithstanding anything contained in Section 6 or in any contract, no banking company shall directly or
indirectly deal in the buying or selling or bartering of goods, except in connection with the realization of
security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than
in connection with bills of exchange received for collection or negotiation or with such of its business as is
referred to in Clause (i) of sub-section (1) of Section 6:
[Provided that this section shall not apply to any such business as is specified in pursuance of Clause (0) of
sub-section (1) of Section 6]
Bnkad.18.Sanjay v & mmk 1

M
Section Contents
11 & Requirement as to minimum paid-up capital and reserves

12 Regulation of paid-up capital, subscribed capital and authorised capital and voting
rights of share holders
15 Restrictions as to payment of dividend
No banking company shall pay any dividend on its shares until all its capitalised expenses
(including preliminary expenses, organization expenses, share-selling commission, brokerage,
amounts of losses incurred and any other item of expenditure not represented by tangible assets)
have been completely written off.
Notwithstanding anything to the contrary contained above, or in the Companies Act, 2013 a
banking company may pay dividends on its shares without writing off
(i) the depreciation, if any, in the value of its investments in approved securities in any case
where such depreciation has not actually been capitalized or otherwise accounted for as a
loss;
(ii) the depreciation, if any, in the value of its investments in shares, debenture or bonds (other
than approved securities) in any case where adequate provision for such depreciation has
been made to the satisfaction of the auditor of the banking company;
(iii) the bad debts, if any, in any case where adequate provision for such debts has been made to
the satisfaction of the auditor of the banking company
17 Reserve fund
(regarding creation of, and mandatory transfer to, a reserve fund every year, a sum equivalent to
not less than twenty per cent of the profit as shown in the profit and loss account prepared as per
Section 29 of the Act, before declaration of any dividend).
This is the statutory requirement.
18 Cash reserve
(regarding compulsory maintenance by way of :
cash reserve with itself and/or
balance in a current account with the RBI and/or
net balance in current accounts@,
a sum equivalent, to at least three per cent of the total of its demand and time liabilities* in India;
and report the data to RBI on the reporting Fridays).
(@means the excess of the aggregate of the credit balance in current account maintained with the
SBI or a subsidiary bank or a corresponding new bank over the aggregate of the credit balance
in current account held by the said banks with such banks)
For this, and Section 24,
*liabilities in India shall not include
 the paid-up capital, the reserves or any credit balance in the profit and loss account
 any advance taken from the RBI/ Development Bank/Exim Bank/ Reconstruction Bank/
National Housing Bank/ National Bank /Small Industries Bank.
 loan taken by the bank from its sponsor Regional Rural Bank
 any liability specified by RBI
20 Restrictions on loans and advances
Notwithstanding anything to the contrary contained in Section 67 of the Companies Act, 2013, no
banking company shall,
grant any loans or advances on the security of its own shares, or
enter into any commitment for granting any loan or advance or advance to or on behalf of any of
its directors or key managerial personnel, any firm in which such director or key managerial
personnel is interested as partner, manager, employee or guarantor, or to any company (not
being a subsidiary of the bank or a “Section 8” company or a Government company) of which or
the subsidiary or the holding company of which, such director or key managerial personnel is a
director or key managerial personnel, managing agent, manager, employee or guarantor or in
which he holds substantial interest, or any individual in respect of whom any of its directors or
key managerial personnel is a partner or guarantor.
"loans or advance" shall not include any transaction which the Reserve Bank may, having regard
to the nature of the transaction, the period within which, and the manner and circumstances in
which, any amount due on account of the transaction is likely to be realized, the interest of the
depositors and other relevant considerations, specify by general or special order as not being a
loan or advance.
If any question arises whether any transaction is a loan or advance for the purposes of this
section, it shall be referred to the RBI, whose decision thereon shall be final.

M
Section Contents
20 A Restriction on power to remit debts

Notwithstanding anything to the contrary contained in Sections 180 of the Companies Act, 2013
a bank shall not, except with the prior approval of the RBI, remit in whole or in part any debt due
to it by any director, any firm or company in which such director is director, partner or
guarantor, or any individual if any of its director is his partner or guarantor. Any remission
made in contravention of these provisions shall be void and of no effect.
21 Power of Reserve Bank to control advances by banks
Where RBI is satisfied that it is necessary or expedient in the public interest or in the interests of
depositors, or banking policy so to do, it may determine the policy and give directions in relation
to advances to be followed by banks generally and the banks shall be bound to follow the policy
so determined.
RBI may give directions to banks, either generally or to any banking company or group of
banking companies in particular, as regards
the purposes for which advance may or may not be made,
the margins to be maintained in respect of secured advances,
the maximum amount of advances or other financial accommodation or guarantee facilities
which may be extended to any one company, firm, association of persons or individual,
the rate of interest and other terms and conditions on which advances or other financial
accommodation may be made or guarantees given.
24 Maintenance of a percentage of assets
Each bank is required to maintain in India, in cash, gold or unencumbered approved securities,
value at a price not exceeding the current market price, an amount which shall not, at the close of
business on any day, be less than 20 per cent. of the total of the bank’s demand and time
liabilities in India.
(unencumbered approved securities include its approved securities lodged with another
institution for an advance/ other credit arrangement to the extent to which such securities have
not been drawn against or availed of)
In computing the amount, the deposit required under Section 11 (2) of the Act, to be made with
the RBI by a banking company incorporated outside India and any balance maintained in India
by a banking company in current account with the RBI or the SBI or with any other bank which
may be notified in this behalf by the Central Government, including in the case of a scheduled
bank, the balance required under Section 42 of the Reserve Bank of India Act, 1934 to be so
maintained, shall be deemed to be cash maintained in India.
A scheduled bank, in addition to the average daily balance which it is, or may be, required to
maintain under Section 42 of the Reserve Bank of India Act, 1934 and every other banking
company, in addition to the cash reserve which it is required to maintain under Section 18 of the
Act, shall maintain in India,
a. in cash, or
b. in gold valued at a price not exceeding the current market price or in unencumbered
approved securities valued at a price determined in accordance with such one or more of, or
combination of valuation, being with reference to cost price, market price, book value or face
value, as may be specified by the RBI from time to time,
an amount which shall not, at the close of business on any day, be less than twenty-five per cent,
or such other percentage not exceeding forty per cent. as the RBI may, from time to time, by
notification in the Official Gazette, specify, of the total of its demand and time liabilities.
25 Assets in India
The assets in India of every banking company at the close of business on the last Friday of every
calendar quarter(June, September, December, March) or, if that Friday is a public holiday under
the Negotiable Instruments Act, 1881, at the close of the business on the preceding working day,
shall not be less than seventy-five per cent. of its demand and time liabilities in India
"assets in India" shall be deemed to include export/ import bills drawn in/ on and payable, in
India and expressed in such currencies as RBI may from time to time approve in this behalf, and
also such securities as the RBI may approve in this behalf, notwithstanding that all or any of the
said bills or securities are held outside India;
"liabilities in India" shall not include the paid-up capital or the reserves or any credit balance in
the profit and loss account
26 Return of unclaimed deposits
Deposits unclaimed for over 10 years to be communicated to RBI, in the form and manner
prescribed

M
Section Contents
29 Accounts and balance-sheet

(1) At the expiration of each calendar year or at the expiration of a period of twelve months
ending with such date as the Central Government may, by notification in the Official
Gazette, specify in this behalf, every banking company incorporated in India, in respect to
all business transacted by it, and every banking company incorporated outside India, in
respect of all business transacted through its branches in India, shall prepare with reference
to that year or period as the case may be, a balance-sheet and profit and loss account, as on
the last working day of that year or the period, as the case may be, in the forms set out in the
Third Schedule or as near thereto as circumstances admit.
(2) The balance-sheet and profit and loss account shall be signed
(a) in the case of a banking company incorporated in India, by the manager or the principal
officer of the company and where there are more than three directors of the company,
by at least three of those directors, or where there are not more than three directors by
all the directors; and
(b) in the case of banking company incorporated outside India by the manager or agent of
the principal office of the company in India.
(3) Notwithstanding that the balance-sheet of a banking company is under sub-section (1)
required to be prepared in a form other than the form set out in Part I of Schedule III to the
Companies Act, 2013 (the requirements of that Act relating to the balance-sheet and profit
and loss account of a company shall, in so far as they are not inconsistent with this Act,
apply to the balance-sheet or profit and loss account, as the case may be, of banking
company.
(4) The Central Government, after giving not less than three months' notice of its intention so to
do by a notification in the Official Gazette, may from time to time by a like notification
amend the forms set out in the Third Schedule.
30 Audit
(1) The balance-sheet and profit and loss account prepared in accordance with Section 29 shall
be audited by a person duly qualified under any law for the time being in force to be an
auditor of companies.
(1-A) Notwithstanding anything contained in any law for the time being in force or in any
contract to the contrary, every banking company shall, before appointing, re-appointing
or removing any auditor or auditors, obtain the previous approval of the RBI.
(1-B) Without prejudice to anything contained in the Companies Act, 2013 or any other law for
the time being in force, where the RBI is of opinion that it is necessary in the public
interest or in the interests of the banking company or its depositors so to do 5[it may at
any time by order direct that a special audit of the banking company's accounts, for any
such transaction or class of transactions or for such period or periods as may be
specified in the order, shall be conducted and may by the same or a different order
either appoint a person duly qualified under any law for the time being in force to be an
auditor of companies or direct the auditor of the banking company himself to conduct
such special audit], and the auditor shall comply with such directions and make a
report of such audit to the RBI and forward a copy thereof to the company.
(1-C) The expenses of, or incidental to, the special audit specified in the order made by the RBI
shall be borne by the banking company.]
(2) The auditor shall have the powers of, exercise the functions vested in, and discharge the
duties and be subject to the liabilities and penalties imposed on, auditors of companies
by Sec. 143 of the Companies Act, 2013 and auditors, if any, appointed by the law establishing,
constituting or forming the banking company concerned.
(3) In addition to the matters which under the aforesaid Act the auditor is required to state in his report,
he shall, in case of a banking company incorporated in India, state in his report, as to whether or
not
(a) the information and explanation required by him have been found to be satisfactory;
(b) the transactions of the company which came to his notice have been with the powers of the
company;
(c) the returns received from branch offices of the company have been found adequate for the
purposes of his audit;
(d) the profit and loss account shows a true balance or profit or loss for the period covered by
such account; and
(e) there is any other matter which he considers should be brought to the notice of the
shareholders of the company.

M
Section Contents
31 Submission of returns
The accounts and balance-sheet together with auditor's report shall be published in the
prescribed manner and three copies thereof shall be furnished as returns to the RBI within three
months from the end of period to which they refer; the said period of three months could, in any
case, be extended by a further period not exceeding three months.
32 Copies of balance-sheet and accounts to be sent to Registrar
35-A Power of the Reserve Bank to give directions
Where the RBI is satisfied that:
 in the public interest; or
 in the interest of banking policy; or
 to prevent the affairs of any banking company being conducted in a manner detrimental to the
interests of the depositors; or
 in a manner prejudicial to the interests of the banking company; or
 to secure the proper management of any banking company generally;
it is necessary to issue directions to banks generally, or to any bank in particular, it may, issue
such directions as it deems fit, and the banks shall be bound to comply with such directions.

BANK AUDIT 2017-18- abbreviations used in the banking industry N
Abbreviations have often been found to be used by the banking industry and in the Circulars/ guidelines/directions
of the Reserve Bank of India. It is appropriate to understand what these abbreviations are:
Abbreviation Expanded form
AACS As Applicable to Co-operative Societies
ACF Auto-Correlation Function
AD Authorised Dealer
ADB Asian Development Bank
ADR American Depository Receipt
AE Aggregate exposure
AFS Annual Financial Statement
AFS Available For Sale
AGM Annual General Meeting
AICCCA Association of Independent Consumer Credit Counseling Agencies
AIFI All-India Financial Institution
AIRCSC All India Rural Credit Survey Committee
ALM Asset-Liability Management
AMC Asset Management Company
AML Anti-Money Laundering
AO Additive Outliers
AR Auto Regression
ARC Asset Reconstruction Company
ARCIL Asset Reconstruction Company (India) Ltd.
ARIMA Auto-Regressive Integrated Moving Average
ASSOCHAM Associated Chambers of Commerce and Industry of India
ATM Asynchronous Transfer Mode
ATM Automated Teller Machine
BCBS Basel Committee on Banking Supervision
BCP Business Continuity Planning Process
BCSBI Banking Codes and Standards Board of India
BFS Board for Financial Supervision
BG Bank Guarantees
BIFR Board for Industrial and Financial Reconstruction
BIS Bank for International Settlements
BIS Bureau of Indian Standards
BoP Balance of Payments
BOS Banking Ombudsman Scheme
BOT Build-Operate-Transfer
BPLR Benchmark Prime Lending Rate
BPM5 Balance of Payments Manual, 5th edition
BPSD Balance of Payments Division, DESACS, RBI
BPSS Board for Payment and Settlement Systems
BSC Balanced Scorecard
BSCS Basel Committee on Banking Supervision
BSE Bombay Stock Exchange Ltd.
BSR Basic Statistical Return
CAD Capital Account Deficit
CAG Controller and Auditor General of India
CALCS Capital Adequacy, Asset Quality, Liquidity, Compliance and System
CAMELS Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, Systems and control
CAP Corrective Action Plan
CBLO Collateralised Borrowing and Lending Obligation
CBS Core Banking Solutions
CBS Consolidated Banking Statistics
CC Cash Credit
CCCS Consumer Credit Counseling Service
CCDM Credit Counseling and Debt Management
CCIL Clearing Corporation of India Ltd.
CCP Central Counter Party
CD Ratio Credit Deposit Ratio
Bnkad.18.Sanjay v &mmk 1
CD Certificate of Deposit
CDBMS Central Data-base Management System
CDBS Committee of Direction on Banking Statistics
CDF Co-operative Development Fund
CDR Corporate Debt Restructuring
CDRM Corporate Debt Restructuring Mechanism
CEO Chief Executive Officer
CF Company Finance
CFMS Centralised Funds Management System
CFRA Combined Finance and Revenue Accounts
CFS Consolidated Financial Statements
CFT Combating Financing of Terrorism
CGFT Credit Guarantee Fund Trust
CGRA Currency and Gold Revaluation Account
CGTSI Credit Guarantee Trust for Small Industries
CRGFTLIH Credit Risk Guarantee Fund Trust for Low Income Housing
CGTMSE Credit Guarantee Fund Trust For Micro And Small Enterprises
CIBIL Credit Information Bureau of India Limited
CII Confederation of Indian Industries
CIN Corporate Identity Number
CLCC Central Labour Co-ordination Committee
CLF Collateralised Lending Facility
CME Capital Market Exposure
CMP Conflict Management Policy
CO Capital Outlay
COBIT Control Objectives for Information and related Technology
CP Commercial Paper
CPC Cheque Processing Centre
CPI Consumer Price Index
CPI-IW Consumer Price Index for Industrial Workers
CPOS Central Point of Supervision
CPPAPS Committee on Procedures and Performance Audit on Public Services
CPSS Committee on Payment and Settlement System
CPTC Collection and Purity Testing Centre
CR Capital Receipts
CRAs Credit Rating Agencies
CRAR Capital to Risk-Weighted Asset Ratio
CRCS Central Registrar of Co-operative Societies
CRE Commercial Real Estate
CRE – RH Commercial Real Estate – Residential Housing Sector
CRILC Central Repository of Information on Large Credits
CRR Cash Reserve Ratio
CSA Co-operative Societies Act
CSD Customer Service Department
CSGL Constituent Subsidiary General Ledger
CSIR Council of Scientific and Industrial Research
CSO Central Statistical Organisation
CTR Cash Transaction Report
CTS Cheque Truncation System
CVC Central Vigilance Commission
D&B Dun & Bradstreet Information Services India (P) Ltd.
DAPs Development Action Plans
DBOD Department of Banking Operations and Development
DBS Department of Banking Supervision
DCA Debtor creditor agreement
DCB Demand Collection and Balance
DCCB District Central Co-operative Banks
DCCO Date of Commencement of Commercial Operations
DCM Department of Currency Management, RBI
DCRR Department for Co-operative Revival and Reforms
DD Demand Draft
DDS Data Dissemination Standards
DEIO Department of External Investments and Operations
DESACS Department of Statistical Analysis & Computer Services, RBI
DFI Development Finance Institution
DGBA Department of Government and Bank Accounts, RBI
DGCI&S Directorate General of Commercial Intelligence and Statistics
DI Direct Investment
DICGC Deposit Insurance and Credit Guarantee Corporation of India
DID Discharge of Internal Debt
DLIC District Level Implementation and Monitoring Committee
DMA Direct Marketing Agent
DNSS Deferred Net Settlement System
DP Drawing Power
DPSS Department of Payment and Settlement Systems
DRI Differential Rate of Interest
DRT Debt Recovery Tribunal
DSA Direct Sales Agent
DSBB Dissemination Standards Bulletin Board
DTL Demand and Time Liability
DvP Delivery versus Payment
EBR Export Bills Rediscounted
ECB External Commercial Borrowing
ECB European Central Bank
ECGC Export Credit and Guarantee Corporation
ECS Electronic Clearing Service
EDMU External Debt Management Unit
EEA Exchange Equalization Account
EEC European Economic Community
EEFC Exchange Earners Foreign Currency
EFR Exchange Fluctuation Reserve
EFT Electronic Funds Transfer
EME Emerging Market Economy
EPF Employees Provident Fund
ESOP Employee Stock Option Plans
ETF Empowered Task Force
EUR Euro
EWS Early Warning System
EXIM Bank Export Import Bank of India
FAQs Frequently Asked Questions
FCA Foreign Currency Assets
FCAC Fuller Capital Account Convertibility
FCCB Foreign Currency Convertible Bond
FCNR (B) Foreign Currency Non-Resident (Banks)
FCNR Foreign Currency Non-Resident
FCNRA Foreign Currency Non-resident Account
FCNRD Foreign Currency Non-Repatriable Deposit
FDI Foreign Direct Investment
FDIC Federal Deposit Insurance Corporation
FEDAI Foreign Exchange Dealers Association of India
FEMA Foreign Exchange Management Act
FFI Foreign Financial Institution
FFMC Full Fledge Money Changer
FI Financial Institution
FICCI Federation of Indian Chambers of Commerce and Industry
FII Foreign Institutional Investor
FIPB Foreign Investment Promotion Board
FISIM Financial Intermediation Services Indirectly Measured
FITL Funded Interest Term Loan
FIU-IND Financial Intelligence Unit – India
FLAS Foreign Liabilities and Assets Survey
FMC Forward Market Commission
FMD Financial Markets Department
FOF Flow Of Funds
FPI Foreign Portfolio Investment
FRA Forward Rate Agreement
FRB Floating Rate Bond
FRBM Act Fiscal Responsibility and Budget Management Act
FRMS Fraud Reporting and Monitoring System
FRN Floating Rate Note
FSAP Financial Sector Assessment Programme
FSR Financial Stability Report
FSS Farmers’ Service Societies
FST Financial Sector Technology
FWG First Working Group on Money supply
GBP Great Britain Pound
GCC General Credit Card
GCS Gold Card Scheme
GDCF Gross Domestic Capital Formation
GDP Gross Domestic Product
GDR Global Depository Receipt
GFD Gross Fiscal Deficit
GFS Government Finance Statistics
GIC General Insurance Corporation
GLS Generalized Least Squares
GNIE Government Not Included Elsewhere
GoI Government of India
GPD Gross Primary Deficit
G-Sec Government Securities
GST Goods and Services tax
HDFC Housing Development Finance Corporation
HFT Held For Trading
HICP Harmonised Index of Consumer Prices
HO Head Office
HTM Held to maturity
HUDCO Housing & Urban Development Corporation
IBRD International Bank for Reconstruction and Development
IBS International Banking Statistics
ICA Inter creditor Agreement
ICE Independent Credit Evaluation
ICAR Indian Council of Agricultural Research
ICMR Indian Council of Medical Research
IDB India Development Bonds
IDD Industrial Development Department
IEC Independent Evaluation Committee
IFAD International Fund for Agricultural Development
IFC International Finance Corporation
IFC(W) International Finance Corporation (Washington)
IFCI Industrial Finance Corporation of India
IFR Investment Fluctuation Reserve Account
IFS International Financial Statistics
IGC India Gold Coins
IGLS Iterative Generalized Least Squares
IIBI Industrial Investment Bank of India
IIP Index of Industrial Production
IIP/InIP International Investment Position
IMD India Millennium Deposits
IMF International Monetary Fund
IN India
INR Indian Rupee
IOTT Input-Output Transaction Table
IP Interest Payment
IRAC (Norms) Income Recognition, Asset Classification and Provisioning pertaining to Advances
IRBI Industrial Reconstruction Bank of India
ISDA International Swaps and Derivative Association
ISIC International Standard Industrial Classification
ISO International Standards Organization
IT Information Technology
ITGGSM Internal Technical Group on Government Securities Market
ITGI IT Governance Institute
ITIL IT Infrastructure Library
ITRS International Transaction Reporting System
IWGEDS International Working Group on External Debt Statistics
JLF Joint Lenders’ Forum
JLG Joint Liability Groups
JPC Joint Parliamentary Committee
KCC Kisan Credit Card
KVIB Khadi and Village Industries Board
KVIC Khadi & Village Industries Corporation
KYC Know your Customer
LAB Local Area Bank
LAF Liquidity Adjustment Facility
LAMPS Large-sized Adivasi Multipurpose Societies
LAS Loan & Advances by States
LBD Land Development Bank
LBS Locational Banking Statistics
LC Letter of credit
LERMS Liberalised Exchange Rate Management System
LIBOR London Inter-Bank Offer Rate
LIC Life Insurance Corporation of India
LME London Metal Exchange
LoC Letters of comfort
LOLR Lender of Last Resort
LS Level Shift
LT Long Term
LTCCS Long-Term Co-operative Credit Structure
LTO Long Term Operation
M1 Narrow Money
M3 Broad Money
MA Moving Averag
MAP Monitorable Action Plan
MCA Ministry of Corporate Affairs
MCAs Model Concession Agreements
MEDP Micro Enterprise Development Programme
MFDEF Micro Finance Development and Equity Fund
MFI Micro Finance Institution
MIBOR Mumbai Inter-Bank Offer Rate
MICR Magnetic Ink Character Recognition
MIGA Multilateral Investment Guarantee Agency
MIS Management Information System
MLRO Money Laundering Reporting Office
MLTGD Medium and Long Term Government Deposit
MMBCS Magnetic Media Based Clearing System
MMSE Minimum Mean Squared Errors
MNBC Miscellaneous Non-Banking Companies
MNSB Multilateral Net Settlement Batch
MOF Master Office File
MoF Ministry of Finance
MoU Memorandum of Understanding
MPLS Multi-Protocol Layer Switching
MRM Monitoring and Review Mechanism
MRR Minimum Retention Requirement
MSS Market Stabilisation Scheme
MT Mail Transfer
MTM Mark-To-Market
NABARD National Bank for Agriculture and Rural Development
NAC(LTO) National Agricultural Credit (Long Term Operation)
NAFCUB National Federation of Co-operative Urban Banks
NAIO Non Administratively Independent Office
NAS National Account Statistics
NASSCOM National Association of Software and Services Companies
NAV Net Asset Value
NBC Net Bank Credit
NBC Non-Banking Companies
NBFC Non-Banking Financial Company
NBFI Non-Banking Financial Institutions
NBV Net Book Value
NDS Negotiated Dealing System
NDS-OM NDS Order Matching
NDTL Net Demand and Time Liability
NEC Not Elsewhere Classified
NEDFi North Eastern Development Finance Corporation
NEER Nominal Effective Exchange Rate
NEFT National Electronic Fund Transfer
NFA Non-Foreign Exchange Assets
NFCC National Foundation for Credit Counselling
NFD Net Fiscal Deficit
NFGBC Non-food Gross Bank Credit
NFS National Financial Switch
NGO Non-Government Organisation
NHB National Housing Bank
NHC National Housing Credit
NIA New India Assurance Company Limited
NIC National Industrial Credit
NIC National Industrial Classification
NIF Note Issuance Facility
NIMC National Implementation Monitoring Committee
NNML Net Non-Monetary Liabilities
NOC No Objection Certificate
NOF Net Owned Fund
NPA Non-Performing Asset
NPD Net Primary Deficit
NPFA Non-Performing Financial Assets
NPL Non-Performing Loan
NPRB Net Primary Revenue Balance
NPV Net Present Value
NR(E)RA Non-Resident (External) Rupee Account
NR(NR)RA Non-Resident (Non-Repatriable) Rupee Account
NRE Non-Resident External
NRG Non-Resident Government
NRI Non-Resident Indian
NRNR Non Resident Non Repatriable (Account)
NRSR Non Resident Special Rupee (Account)
NSC National Statistical Commission
NSE National Stock Exchange
NSSF National Small Savings Fund
OBS Off-balance Sheet
OBU Off-Shore Banking Unit
OD Over Draft
ODA Official Development Assistance
OECD Organisation for Economic Co-operation and Development
OECO Organisaton for Economic Co-operation
OFI Other Financial Institutions
OLRR On-line Reject Repair
OLTAS On-line Tax Accounting System
OMO Open Market Operations
ORFS On-line Returns Filing System
OSCB Other Indian Scheduled Commercial Bank
OSMOS Off-Site Monitoring and Surveillance System
OSS Off-site Surveillance System
OTC Over the Counter
OTS One Time Settlement
PACF Partial Auto-Correlation Function
PACS Primary Agricultural Credit Society
PAN Permanent Account Number
PAIS Personal Accident Insurance Scheme
PCARDB Primary Co-operative Agriculture and Rural Development Bank
PCR Provisioning Coverage Ratio
PD Primary Dealer
PD Primary Deficit
PDAI Primary Dealers Association of India
PDO Public Debt Office
PDO-NDS Public Debt Office-cum-Negotiated Dealing System
PES Public Enterprises Survey
PF Provident Fund
PIO Persons of Indian Origin
PIO Principal Inspection Officer
PKI Public Key Infrastructure
PLR Prime Lending Rate
PMLA Prevention of Money Laundering Act
PMRY Prime Minister Rojgar Yojna
PO Principal Office
POS Point of Sale
PPP Public-Private Partnership
PRB Primary Revenue Balance
PSB Public Sector Bank
PSE Public Sector Enterprise
PTC Pass-through certificates
PUC Paid Up Capital
QIS Quantitative Impact Study
QRR Quick Review Report
RBI Reserve Bank of India
RBIA Risk-Based Internal Audit
RBS Risk-Based Supervision
RC Reconstruction Company
RCS Registrar of Co-operative Societies
RD Revenue Deficit
RDBMS Relational Database Management System
RE Revenue Expenditure
REC Rural Electrification Corporation
REER Real Effective Exchange Rate
RERFA Reserve for Exchange Rate Fluctuations Account
R-GDS Revamped Gold Deposit Scheme
R-GML Revamped Gold Metal Loan Scheme
RFC Residents Foreign Currency
RIB Resurgent India Bonds
RIDF Rural Infrastructural Development Fund
RLA Recoveries of Loans & Advances
RLC Repayment of Loans to Centre
RMB Renminbi (Chinese)
RNBC Residuary Non-Banking Company
RO Regional Office
ROC Registrar of Companies
RPA Rupee Payment Area
RPCD Rural Planning and Credit Department, RBI
RR Revenue Receipts
RRB Regional Rural Bank
RTGS Real Time Gross Settlement System
RTP Reserve Tranche Position
RUF Revolving Underwriting Facility
RWA Risk Weighted Asset
SAA Service Area Approach
SACP Special Agricultural Credit Plan
SAM Social Accounting Matrix
SAO Seasonal Agricultural Operations
SAR Self-Assessment Report
SARFAESI Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
SARS Severe Acute Respiratory Syndrome
SAS Statistical Analysis System
SBI State Bank of India
SBNs Specified Bank Notes
SC Securitisation Company
SCARDB State Co-operative Agriculture and Rural Development Bank
SCB Scheduled Commercial Bank
SCB State Cooperative Bank
SCS Size Class Strata
SDDS Special Data Dissemination Standards
SDR Special Drawing Right
SDS Special Deposit Scheme
SEB State Electricity Board
SEBI Securities and Exchange Board of India
SEEUY Self Employment for Educated Unemployed Youths
SEFCs Small Enterprises Financial Centres
SEFT Special Electronic Funds Transfer
SEZ Special Economic Zones
SFAC Small Farmers Agri-Business Consortium
SFC State Financial Corporation
SFMS Structured Financial Messaging System
SGL Subsidiary General Ledger
SGSY Swarn Jayanti Gram Swarojgar Yojna
SHG Self-Help Group
SHPI Self-Help Promoting Institutions
SIDBI Small Industries Development Bank of India
SIDC State Industrial Development Corporation
SIPS Systemically Important Payment System
SI-SPA Systems Improvement Scheme under Special Project Agriculture
SJSRY Swarna Jayanti Shahari Rojgar Yojna
SLA Service Level Agreement
SLAF Second Liquidity Adjustment Facility
SLBCs State Level Bankers’ Committees
SLEPCS State Level Export Promotion Committees
SLR Statutory Liquidity Ratio
SLRS Scheme for Liberalisation and Rehabilitation of Scavengers
SMA Special Mention Account
SME Small and Medium Enterprise
SMG Standing Monitoring Group
SNA System of National Accounts
SPV Special Purpose Vehicle
SRWTO Small R oad & Water Transport Operators
SSC Special Sub-Committees
SSI Small Scale Industry
SSSBEs Small Scale Service & Business Enterprises
ST Scheduled Tribe
STBD Short Term Bank Deposit
StCB State Co-operative Bank
STCCS Short-Term Co-operative Credit Structure
STP Straight Through Processing
STR Suspicious Transaction Report
STRIPS Separate Trading of Registered Interest and Principal of Securities
SWG Second Working Group on Money Supply
SWIFT Society for Worldwide Financial Telecommunication
TAFCUB Task Force for Urban Co-operative Banks
TBs Treasury Bills
TC Temporary Change
TEV Techno-Economic Viability
TFCI Tourism Finance Corporation of India
TLI Term Lending Institutions
TT Telegraphic Transfer
UBB Uniform Balance Book
UBD Urban Banks Department
UCB Urban Co-operative Bank
UCN Uniform Code Number
UIA United India Assurance Company Ltd.
UIDAI Unique Identification Authority of India
US United States
USD US Dollars
UTI Unit Trust of India
UTLBC Union Territory Level Bankers’ Committee
VaR Value at Risk
VC Venture Capital
VCF Venture Capital Fund
VKC Village Knowledge Centre
VPN Virtual Private Networks
VRS Voluntary Retirement Scheme
VSAT Very Small Aperture Terminal
WADR Weighted Average Discount Rate
WCTL Working capital term loan
WEO World Economic Outlook
WGMS Working Group on Money Supply: Analytics and Methodology of Compilation
WGRFIS Working Group on Future Role of Financial Institutions
WPI Wholesale Price Index
WSS Weekly Statistical Supplement
YTM Yield to Maturity
ZO Zonal Office
XBRL Extensible Business Reporting Language
BANK AUDIT - METHOD OF COMPUTATION OF INTEREST ON FCNR(B) DEPOSITS O
(RBI Master Circular DBR.No.Dir.BC.8/13.03.00/2015-16 dated July 1, 2015 read
with RBI Master Directions DBR.Dir.No.84/13.03.00/2015-16 dated March 3, 2016)
DEPOSIT AMOUNT - CURRENCY UNIT (CU) 1000

DEPOSIT TAKEN ON 15 TH APRIL 2016 - RATE OF INTEREST 3% PA
1. IF THE DEPOSIT IS FOR ONE YEAR

BASIS OF COMPUTATION >>>>>>>> CU 1000 x 3% x 365/360
TOTAL INTEREST ON THE DEPOSIT CU 30.42 (rounded off to two digits)
MATURITY VALUE OF THE DEPOSIT ON 15 APRIL 2018 CU 1030.42
SPLIT UP OF INTEREST ON DEPOSIT

Up to 31 March 2018 – Accrued but not due (CU30.42 x 350/365) CU 29.17
1 April – 15 April 2018 (CU 30.42x15/365) CU 1.25
INTEREST ACCRUED AND DUE ON 15 APRIL 2018 CU 30.42
2. IF THE DEPOSIT IS FOR TWO YEARS MATURING ON 15 APRIL 2018
A. BASIS OF COMPUTATION AS PER THE RBI Interest@ Principal and

DIRECTIVE interest for
computation
CU CU
a. DEPOSIT AT INCEPTION (15-4-2016 ) 1000.00
b. INTEREST ON CU 1000.00 x 3% x 180/360 15 .00 1015.00
c. INTEREST ON CU 1015.00 x 3% x 180/360 15.23 1030.23
d. INTEREST ON CU 1030.23 x 3% x 180/360 15.45 1045.68
e. INTEREST ON CU 1045.68 x 3% x 180/360 15.69 1061.37
f. INTEREST ON CU 1061.37x 3% x 10/360 0.88 1062.25
Total cumulative interest@ and maturity amount due@@ @62.25 @@1062.25

(15-4-2018)
Notes:
a.The computations are be made in the currency in which the deposit was made , and for the
sake of convenience, the above computation is made in Currency Unit (CU).
b. @As per Para 1.6 RBI Master Circular (DBR.No.Dir.BC.8/13.03.00/2015-16 dated July 1,
2015) of instructions relating to deposits held in FCNR(B) Accounts, the interest on the
deposits accepted under the scheme should be calculated on the basis of 360 days to a
year; and should be calculated on compounding basis at intervals of 180 days each and
thereafter for the remaining actual number of days, till maturity of the deposit. Accordingly,
interest is computed on the basis of a 360 day year, and compounded with half yearly
rests (180 days), for the number of years of the deposit and the residue period to make
up for the normal year of 365/366 days (if a leap year), is to be reckoned as the last
part of the calculations.
c. In the books of account, and for the purpose of the disclosures in the financial statements,
st
interest for the period from 15 April 2016 till 15 April 2017, is to be pro rated till 31
March 2017 and similarly from 15-4-2017 to 31-3-2018.
d. As per Para 1.1 of the said Circular. the term “Deposit” under the Scheme means “term
deposit” received for a fixed period and withdrawable only after the expiry of the said
fixed period and includes Reinvestment Deposits and Cash Certificates or other deposits of
similar nature.
In the above instance, the maturity value at CU 1062.25, is inclusive of interest accrued
but not due till 15 April 2018. Such accrued interest cannot be reckoned as part of the
Deposits Portfolio, but will be shown as part of ‘Other Liabilities – Interest Accrued’, in
Schedule 5 of the Bank’s balance sheet, till its contractual maturity.

BANK AUDIT - METHOD OF COMPUTATION OF INTEREST ON FCNR(B) DEPOSITS O
(RBI Master Circular DBR.No.Dir.BC.8/13.03.00/2015-16 dated July 1, 2015 read
with RBI Master Directions DBR.Dir.No.84/13.03.00/2015-16 dated March 3, 2016)
e. There can be two possible methods of carving out the interest accrued but not due, as
attributable to each accounting period. The simple method is to equate the entire
interest on a time proportion basis. The other method is to actually compute the
interest on the amount as would accrue at the end of the accounting period based on
the applicable rate and the time elapsed, as under:
B. INTEREST ON EQUATED Period No. of Interest

BASIS days accrued
FOR THE PERIOD TILL 31-3-2017 15-4-2016 to 350 29.84
=62.25 X 350/370 31-3-2017
FOR THE YEAR ENDED 31-3- 1-4-2017 to 365 31.13
2018 = 62.25 X 365/730 31-3-2018
INTEREST ACCRUED NOT DUE 60.97
AS ON 31-3-2018 IN THE BOOKS
62.25 X 15/370 1-4-2018 to 15 1.28
15-4-2018
Total cumulative interest@ and 730 @62.25 @@1062.25
maturity amount due@@
C. BASIS OF COMPUTATION Period of No. of Interest Principal

FOR YEARLY ACCRETION OF computation days Accrued but and interest
INTEREST ACCRUED - not due in for
ALTERNATE METHOD books CU computation
CU
DEPOSIT AT INCEPTION XXXXXXX 1000.00
INTEREST ON CU 1000.00 x 3% 15-4-2016 to 180 15 .00 1015.00
x 180/360 15-10-2016
INTEREST ON CU 1015.00 x 3% x 16-10-2016 to 165 13.95 1028.95
165/360 31-3-2017
INTEREST ACCRUED AND NOT 15-4-2016 to 28.95
DUE ON 31-3-2018 31-3-2017
INTEREST FOR THE FIRST 15 1-4- 17 to 15 1.28 1030.23
DAYS OF APRIL 2018, TO MAKE 15-4-2017
UP FOR THE PERIOD UPTO15-4-
2018 (15.23 at 2A(c ) above
minus 13.95 )
180/360 -2A (d) above 14-10-2017
166/360 31-3-2018
INTEREST ACCRUED FOR THE 1-4-2017 to 31.10
YEAR 2018-19 31-3-2018
INTEREST ACCRUED AND NOT 15-4-2016 to 60.05
DUE ON 31-3-2019 31-3-2018
BALANCE OF INTEREST, BASED 1-4-2018 to 25 2.20 1062.25
ON DIFFERENCE IN 15-4-2018
COMPUTATION OF NO. OF DAYS
PER YEAR AND THE NORMAL
CALENDAR YEAR AND FOR
THE RESIDUE PERIOD
Total cumulative interest@ and 730 @62.25 @@1062.25
maturity amount due@@

BANK AUDIT 2017-18 P
Computation of Drawing Power (DP) in case of stocks and debtors
Where credit facilities are extended by the bank to the borrower towards working capital
requirements against the security of stocks and book debts, the terms of sanction invariably
stipulate the margins to be applied to the net eligible amounts. The borrowers are expected
to utilise the facilities, at lower of the level of the limits or the Drawing Power (DP) as
determined as per the sanction terms.
DP is required to be computed, net of the stipulated margin, to be applied on total eligible

current assets comprising stocks and debtors, as under:
a) realistic value of hypothecated stocks, net of unpaid for stocks (whether covered by
LCs/ Guarantees/ Co-acceptances or otherwise) ; and
b) amount of eligible trade Debtors Less Bills Discounted with the Bank
This is illustrated by the following example:
Particulars of current assets Rs. DP(Rs)
i On stocks:
Stocks at realizable value 1000
Less: Unpaid stocks:
Sundry creditors 300
Acceptances/LCs /Buyers’
Credit etc. 300 600
------- -------
Paid for stocks 400
Margin stipulated 25% 100 300
------------------------------------- ------
ii Debtors 1000
Ineligible debtors 200
-------
Eligible debtors 800
Margin stipulated 50% 400 400
------- -------
Total DP 700
-------
The value of stocks/inventories is considered , net of obsolescence, at lower of cost and net
realiasable value; while eligible debtors (for goods sold or services rendered), would
include current debts comprising amounts considered good and recoverable.

BANK AUDIT 2017-18 P
Computation of Drawing Power (DP) in case of stocks and debtors
The Bank , and in case of consortium lending, the lead bank, should insist on such
information from borrowers, as the appraisal and terms of sanction would so warrant.
Computation of DP on the above basis is vital, particularly in cases of default, and in
border-line cases where the health status of borrowers may be in question.
The Reserve Bank of India had been issuing guidelines on the treatment of unpaid stocks
while arriving at the drawing power available in the borrowal accounts. The thrust of the
guidelines is avoidance of double financing on the unpaid stocks, if such stocks are taken
as eligible for computation of DP. The principle stated above was reiterated by the Reserve
Bank of India, vide its directive No. IECD.No.32/08.10.01/92-93 dated 28th April, 1993, and this
principle is valid at present.
The Bank must have on its record evidence as to the ownership, existence and realisable
market value of the stocks charged to the bank, and authentic information as to unpaid
stocks that will enable computation of the DP accurately and in line with the terms of
sanction. It would be unrealistic to assume that the composition of the stock items , the
level of stocks held and the unpaid for stocks considered at the time of appraisal/ sanction
(on which margins are stipulated), will continue at the same level, and that there will be no
change in the working capital as then considered for computation of DP. For this reason,
DP is required to be recomputed based on variations, not only in the composition and level
of stocks , but also the unpaid for stocks, before the stipulated margin is applied as per the
sanctioned terms. It may be noted that stocks charged as security do not include advances
paid to suppliers for purchase of stocks, till the goods are supplied and the significant risks
and rewards of ownership therein vest in the borrower entity. The terms and conditions of
sanction and the Bank’s lending policy, need to be referred to for strict compliance.
The principles of computation of DP apply equally to borrowings in consortium

arrangements, where generally the lead bank computes the DP and communicates the same
to the other banks in consortium. If correctly computed by the leader bank on the above
basis, the DP computation needs to be accepted by the other banks in consortium. If,
prima facie, the DP is wrongly computed by the leader bank or it is not in line with the terms
of sanction of the bank being audited, the same would require recomputation.
Non-compliance by the borrower in giving the requisite information, or accepting from the
borrower, inadequate or wrong information regarding the unpaid for stocks, would cast
doubts on the accuracy of the DP. Such doubts need to be resolved to ensure that the
computation of DP by the lead bank is in line/ compliance with the bank’s own terms of
sanction.
The Bank’s policy must also be reviewed, if it constitutes an inherent weakness in the credit
system, where the stringency in appraisal, is relaxed while sanctioning/disbursement of the
advances, having consequential effect on monitoring and supervision, and may have effect
the status of the Borrower, where the drawing power falls short of the outstanding.
Besides a view being taken as to the classification of the borrowal account, absence /
inadequacy of the requisite information could also lead to a disclaimer in the audit
report. This needs to be considered for reporting also in the LFAR.

BANK AUDIT 2017-18 Q
Reserve Bank of India (Gold Monetization Scheme) Direction, 2015
In exercise of the powers conferred on the Reserve Bank of India (RBI) under Section 35 A of the
Banking Regulation Act, 1949 and in pursuance of the Central Government notification issued vide
Office Memorandum F.No.20/6/2015-FT dated September 15, 2015 regarding “Gold Monetization
Scheme (GMS)”, the RBI issued Master Direction No.DBR.IBD.No.45/23.67.003/2015-16 dated
22-10-2015 to all Scheduled Commercial Banks that decide to implement the Scheme(excluding
Regional Rural Banks), requiring such banks that decide to implement the Scheme (Designated
Bank), to formulate a comprehensive policy with approval of their respective boards.
The Gold Monetization Scheme, 2015 (GMS) which includes the Revamped Gold Deposit Scheme
(R-GDS) and Revamped Gold Metal Loan Scheme (R-GML) was intended to mobilise gold held by
households and institutions to facilitate its use for productive purposes, and to reduce country’s
reliance on the import of gold.
Designated Banks are authorised to accept deposits, the principal and interest of which, under the
scheme, shall be denominated in gold. Such deposits can be accepted from eligible persons viz.,
Resident Indians (Individuals, HUFs, Trusts including Mutual Funds/Exchange Traded Funds
registered under SEBI (Mutual Fund) Regulations and Companies. Joint deposits of two or
more eligible depositors can be made on the same basis as other joint deposit accounts and with
nomination facility.
The broad features of the Scheme are summarised below:
Acceptance of 1. Deposits under the scheme are to be made at the

Deposits and
Interest accretion a. Collection and Purity Testing Centre (CPTC) - the collection and
assaying centres certified by the Bureau of Indian Standards (BIS)
and notified by the Central Government for the purpose of handling
gold deposited and redeemed under the Scheme, or
b. designated bank branches, where, at their discretion, banks
may accept the deposit of gold.
2. Minimum Deposits -With no maximum limit for deposit, the minimum

deposit at any one time shall be raw gold (bars, coins, jewellery,
excluding stones and other metals) equivalent to 30 grams of gold (of
995 fineness only).
3. Assaying of Gold - All gold deposited under the scheme, whether

tendered at the CPTC or designated bank branches, shall, (except
standard good delivery gold accepted at the designated branches),
be assayed at CPTC for fire assaying.
4.Interest on such deposits accrues from the date of conversion of

gold deposited into tradable gold bars after refinement or 30 days
after the receipt of gold at the CPTC or the bank’s designated branch,
as the case may be, whichever is earlier.
5.Gold deposited to be treated as an item in safe custody - Between
the date of acceptance of the gold and till commencement of the date
of accretion of interest, the gold deposited shall be treated as an item
in safe custody held by the designated bank.

Valuation On the day the gold deposited starts accruing interest, the designated
banks shall translate the gold liabilities and assets in Indian Rupees*.
The prevalent custom duty for import of gold will be added to the above
value to arrive at the final value of gold. This methodology will also be
followed for valuation of gold at any subsequent valuation date(s) and for
the conversion of gold into Indian Rupees under the Scheme.
(*by crossing the London AM fixing for Gold / USD rate with the Rupee-
US Dollar reference rate announced by RBI on that day)
Reporting to RBI The designated banks will be required to submit a monthly report on
GMS to the RBI in the prescribed format.
However, as per RBI Circular No. DGBA GAD No 2294/15.04.001/2016-

17 dated March 6, 2017, in order to have uniformity in reporting,
reconciliation and accounting, agency banks may report the Gold
Monetisation Scheme transactions i.e., receipt, payment, penalty,
interest, commission for mobilisation, handing charges, etc., directly
through the government account maintained for the purpose at Central
Accounts Section, Reserve Bank of India, Nagpur, on a daily basis.
Opening of Gold Customer identification criteria as applicable to any other deposit
Deposit Account accounts( KYC norms ), shall apply and non customers can open a
gold deposit account with zero balance at any time prior to tendering
(opened with a gold at the CPTC.
designated bank The designated banks will credit/record the STBD or MLTGD, as the
under the Scheme case may be ( with the amount of 995 fineness gold as indicated in the
and denominated in advice received from CPTC), after 30 days of receipt of gold at the
grams of gold) CPTC, regardless of whether the depositor submits the receipt for
issuance of the deposit certificate or not.
Tendering of gold to CPTC
Before tendering the raw gold to a CPTC, the depositor shall indicate the
name of the designated bank with whom he would like to place the
deposit.
After assaying the gold, the CPTC will issue a receipt signed by
authorised signatories of the centre showing the standard gold of 995
fineness on behalf of the designated bank indicated by the depositor.
Simultaneously, the CPTC will also send an advice to the designated
bank regarding the acceptance of deposit.
Fee to CPTC
If in agreement with result of the fire assay test, the customer will
exercise his option to deposit the gold with the bank and the fee charged
by the CPTC will be borne by the bank. In case of any disagreement
with the fire assay result, the customer will have the option to take back
the melted gold after paying a nominal fee to the centre.
Documentation
Standard documentation (designed by IBA including application form
for tendering raw gold to the assaying centers, the description of the
physical appearance/ characteristics of gold, recording of the results of
XRF by the assaying centre, customer’s consent for melting the gold for
fire-assaying and for making the final deposit, the final receipt to be
issued to the depositor ), are to be made known and available to the

CPTCs and to the depositor upfront and should include all the terms and
conditions of the Scheme including the schedule of charges.
---------------------------------------------------------------------------------------
(The 995 fineness equivalent amount of gold as determined by the CPTC will be final and
any difference in quantity or quality found after issuance of the receipt by the CPTC
including at the level of the refinery due to refinement or any other reason shall be settled
among the three parties viz., the CPTC, the refiner and the designated bank in
accordance with the terms of the tripartite agreement to be entered into.)
Types of deposits 1.Short Term Bank Deposit (STBD)
2. Medium and Long Term Government Deposit (MLTGD)
Short Term Bank Duration
Deposit - for a short term period of 1-3 years (with a roll over in
(STBD) multiples of one year), to be treated by banks as their on-balance
sheet liability; the duration being subject to such minimum lock-in
period and penalties, if any, as may be determined by the banks as per
their laid down policy.
Interest - banks are free to fix the interest rates ; and the interest shall
be credited in the deposit accounts on the respective due dates and will
be withdrawable periodically or at maturity as per the terms of the
deposit.
Redemption of principal and interest at maturity will, at the option of

the depositor be either in Indian Rupee equivalent of the deposited gold
and accrued interest based on the price of gold prevailing at the time of
redemption, or in gold. The option in this regard shall be made in writing
by the depositor at the time of making the deposit and shall be
irrevocable:
i. Premature redemption, if any, shall be in Indian Rupee equivalent or

gold at the discretion of the designated bank.
Imports permitted by designated banks for redemption

The designated banks other than the nominated banks shall be eligible
to import gold only for redemption of the gold deposits mobilised under
the STBD.
(Nominated bank – A Scheduled Commercial Bank authorized by RBI
to import gold in terms of RBI circular A.P.(DIR Series) Circular No.79
dated February 18, 2015)
CRR and SLR
CRR and SLR requirements apply (as per instructions of RBI ) from
the date of credit of the amount to the deposit account. However, the
stock of gold held by banks in their books will be an eligible asset for
meeting the SLR requirement in terms of RBI Master Circular - Cash
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) dated 1 July
2015.

End use
In respect of gold mobilised under the STBD, the designated banks may:
o sell the gold to MMTC for minting India Gold Coins (IGC), to jewellers
and to other designated banks participating in GMS; or
o lend the gold under the GML scheme to MMTC for minting India Gold
Coins (IGC) and to jewellers.
Medium and Deposits shall be accepted by the designated banks on behalf of
Long Term the Central Government and shall constitute the liability of Central
Government Deposit (MLTGD)
Government; and the receipts issued by the Collection and Purity
Testing Centre (CPTC) - the collection and assaying centres certified by
the Bureau of Indian Standards (BIS) and notified by the Central
Government for the purpose of handling gold deposited and redeemed
under the Scheme, and the deposit certificate issued by the
designated banks shall clearly state this.
Accordingly, such deposits shall not be reflected in the balance

sheet of the designated banks. Reserve Bank of India will maintain the
Gold Deposit Accounts denominated in gold in the name of the
designated banks that will in turn hold sub-accounts of individual
depositors.
Control over the gold deposited - The designated banks will hold the
gold deposited on behalf of Central Government until it is transferred to
such person as may be determined by the Central Government.
The gold received under MLTGD will be auctioned by the agencies
notified by Government and the sale proceeds will be credited to
Government’s account held with RBI.
The details of auctioning and the accounting procedure will be notified by
Government of India.
Duration - the deposit can be made for a medium term period of 5-7
years or a long term period of 12-15 years or for such period as may be
decided from time to time by the Central Government. (The designated
banks may allow whole or part premature withdrawal of the deposit
subject to such minimum lock-in period and penalties, if any, as
determined by the Central Government.)
Redemption of the deposit including interest accrued - Redemption

will be only in Indian Rupee equivalent of the value of the gold and
accumulated interest as per the price of gold prevailing at the time of
redemption.
However, as per RBI Circular No. DGBA.GBD.No.1007/15.04.001/2017-18

dated October 17, 2017
- Reimbursement of payments made by banks, relating to Medium
and Long Term Government Deposit (MLTGD), will be made by
Central Account Section (CAS), Nagpur, RBI.

- Accordingly, banks are advised to pay immediately the interest

amount already due to the depositors and to take note that, in
future, payment of interest to the depositors is to be made on the
due dates. After making payments, the banks may raise claim to
Government through RBI (CAS, Nagpur).
End Use:
Gold accepted under MLTGD will be auctioned by MMTC or any other
agency authorized by the Central Government and the sale proceeds
credited to the Central Government’s account with RBI.
The entities participating in the auction may include RBI, MMTC, banks
and any other entities notified by the Central Government in this regard.
Gold purchased by designated bank under the auction may be utilized by
them and they may :
o sell the gold to MMTC for minting India Gold Coins (IGC), to
jewellers and to other designated banks participating in GMS; or
o lend the gold under the Gold Metal Loan (GML) Scheme to MMTC
for minting India Gold Coins (IGC) and to jewellers.
Tripartite agreement The designated bank shall enter into a legally binding tripartite
between the agreement with the refiners and CPTCs with whom they tie up under the
designated banks, Scheme; the refiners being refineries accredited by the National
refiners and CPTCs Accreditation Board for Testing and Calibration Laboratories(NABL) and
notified by the Central Government for the purpose of handling gold
deposited and redeemed under GMS.
The agreement shall cover nature of services to be provided, standards
of service, arrangements regarding movement of gold, payment of fees
and rights and obligations of the parties.
Transfer of gold to The CPTCs will transfer the gold to the refiners as per the terms and
the Refiners conditions set out in the tripartite agreement.
The refined gold may, at the option of the designated bank, be kept in
the vaults maintained by the refiners or at the branch itself.
For the services provided by the refiners, the designated banks will pay a
fee as decided mutually.
The refiners shall not collect any charge from the depositor.
Oversight over the 1.The Central Government:
CPTCs and
Refineries o in consultation with BIS, NABL, RBI and IBA, may put in place
appropriate supervisory mechanism over the CPTCs and the
refiners so as to ensure observance of the standards set out for
these centres by Government (BIS and NABL).
o may take appropriate action including levy of penalties against the
non-compliant CPTCs and refiners.
o may put in place appropriate grievance redress mechanism
regarding any depositor’s complaints against the CPTCs.
2. Complaints against the designated banks regarding any discrepancy

in issuance of receipts and deposit certificates, redemption of deposits,
payment of interest will be handled first by the bank’s grievance redress
process and then by the Banking Ombudsman of RBI.

Risk management The designated banks should put in place suitable risk management
mechanisms including appropriate limits to manage the risk arising from
gold price movements in respect of their net exposure to gold.
The designated banks are allowed to access the International

Exchanges, London Bullion Market Association or make use of Over-
the-counter contracts to hedge exposures to bullion prices subject to the
guidelines issued by RBI.
SUMMARY FOR AUDITOR’S ATTENTION:
The designated banks need to have in place a system to ensure
a) Custody and control over gold received/accepted under the scheme, on its own behalf and on
behalf of the Government.
b) Accounting for Gold purchased to redeem gold deposits (STBD).
c) Stock of gold held and its valuation and disclosure.
d) Accounting for Deposits received as STBD at values as per the Scheme as also interest
accretion.
e) Confirmation at the inception of the STBD, of the manner of redemption either in gold or Rupee
equivalent value then prevailing.
f) Sale of gold as permitted and booking of profit/loss on sale.
g) Lending of gold as permitted under GML to MMTC or Jewellers to verify the related entries
pertaining to advances and interest accretion.

BANK AUDIT -2017-18 NOTE ON TRADE CREDITS FOR IMPORTS IN INDIA R
Indian importers of machinery/goods (as customers of banks in India), are allowed and avail
credit facilities by way of trade credits (Buyers’ and Suppliers’ Credit), as permitted by the
RBI; and this could be done in the form of availment of loans or through acceptances
guaranteed by/through banks in India, to provide the facilities for stipulated tenures, to their
customers (importers) in India. These are briefly explained below.
BUYERS’ CREDIT
Buyer’s Credit refers to loans raised for payment of imports into India, arranged by the
importer from a bank or financial institution outside India. Based on the Indian Importer
bank’s letter of request for a designated foreign currency loan, repayable at the end of the
agreed tenure together with interest as contracted and letter of undertaking/comfort, the
bank overseas credits the Nostro Account of the importer’s bank. Almost immediately
thereafter, the Indian Bank uses the loan funds to make payment to the Suppliers, against
their invoice/bill to the Indian Importer (the Indian Bank’s customer). Thus, while the
exporter /supplier overseas gets paid immediately as contracted, the importer in India gets
the advantage of deferment of payment for the imports at the end of the tenure of the loan.
The importer is allowed to deal with exporter on sight basis, negotiate a better discount and
use the buyer’s credit route to avail financing in any funding currency (USD, GBP, EURO,
JPY etc.) depending on the choice of the customer, before he approaches the Indian bank to
complete the formalities and process of documentation required.
Based on the said procedure and the nature of the documentation, the loan availed would
result in an external commercial borrowing; and should be considered as an on-balance
sheet item for the Indian Bank, rather as a contingent /off balance sheet exposure. The risk
weights should also be considered accordingly.
The auditors should carefully examine the documents to understand the nature of
transactions and their recording as a borrowing/liability with a corresponding term
loan advance as distinguished from mere acceptance of constituents’ obligations, that
could, inter alia, arise in Suppliers’ Credit.
Care needs to be taken to ensure the transactions are appropriately recorded by the Indian
Bank, by keeping an appropriate distinction between Inter bank and inter branch transactions;
by verifying as to whether the funding sought for the Indian importer by the Indian bank, is
through its own overseas branches, or from other banks overseas.
SUPPLIERS’CREDIT
Supplier’s Credit relates to credit extended by the overseas suppliers, banks or financial
institutions outside India, for imports into India. Usance Bills under Letters of Credit (LC)
issued by Indian bank branches on behalf of their importers are discounted by Indian bank
overseas branches or their Foreign bank Correspondents.
Based on the contracted transaction between the overseas supplier and the Indian importer,
procedure involves, the Indian importer approaching arranger to get suppliers credit for the
transaction. The arranger gets an offer from overseas bank on the transaction and the Indian
Importer confirms the terms to the overseas bank and gets the requisite LC issued from his
bank.
Based on the acceptance of the terms and conditions, the overseas supplier ships the goods
and submits the required documents at his bank counters/Supplier’s Credit Bank, that checks
and sends the same for their acceptance by the Importer; and the Importer’s bank provides
guarantee in acceptable form , for ensuring the payment on due date.
The Supplier’s Credit Bank based on acceptance, discounts the bill and makes payment to
Supplier.
On maturity, Importer’s bank in India makes payment to Supplier’s Credit Bank overseas and
claims the amount due together with interest as contracted.
BANK AUDIT -2017-18 NOTE ON TRADE CREDITS FOR IMPORTS IN INDIA R
Acceptance obligations under such credits would result in an off balance exposure requiring
disclosure thereof to be made, together with the interest accrued, the foreign currency
exposure being converted at the year end applicable exchange rates.
[Attention is drawn to the RBI Circulars and reference may be made to the Master Direction (
FED Master Direction No.5/2015-16 January 1, 2016 , as updated to September 19, 2016) re:
External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency
by Authorised Dealers and Persons other than Authorised Dealers , as also RBI Master
Direction – Import of Goods and Services, issued on March 31 2016]
LETTER OF UNDERTAKING (LoU) AND LETTER OF COMFORT (LoC)
Banks agree to accept/ discharge the customers’ contracted liability on due dates and
assume obligations and give undertakings/assurance through execution of documents in the
form of Letters of Comfort or Letters of Undertaking. The distinction between these needs to
be understood.
Letter of Comfort in the banking parlance is referred to a document which is provided by a

person, typically an affiliate (such as the holding / parent company) of the borrower (“LoC
Provider”) assuring the financial soundness of the borrower to repay its debt(s) and applies
generally to obligations between branches or subsidiaries of the bank . These require lower
provisioning under the Basel III Norms.
Letter of Undertaking involves a contract to perform the stated promise, or discharge the
liability, of a third person in case of his default and is used in inter bank obligations. These
attract higher provisioning under the Basel III Norms.

PEER REVIEW CONFIRMATION___________________________ Confidential
(Each item must be completed. If space is inadequate, use inverse side)
Bank: Period/ Year ended____________
S
Audit commenced on:__________________________ Completed on:________________________
PERSONNEL: Submission of Reports /certificates

Audit In-charge : Date of Submission
Partner(s): ______________________________
Audit Assistants: Statutory Audit Report _____________
Name
LFAR ______________
1. ________________________________
Tax Audit Report ______________
2. ________________________________
Certificates/Other work ______________
3. _________________________________ (specify)
4. _________________________________
Confirmations: YES NO
a Is the Letter of appointment, including the scope of work, and acceptance, on
record
b Have all the financial statements, duly drawn up as required, been received
(duly authenticated by the authorized signatories)and do these tally with the
books/records.
c Has the office copy of the financial statements/ schedules given for
authentication by auditors, been counter-signed on each page
d Have all the files / work papers been arranged and indexed
e Is there an adequate Management response to the queries raised/
explanations sought Prior to commencement of audit (as per letter sent)
In the course of audit
(Are the above on record. If so, refer page Nos.____to_____)
f Does the Audit Programme incorporate any additional procedures and areas of
checking undertaken as audit progressed
g Has a programme /check list been drawn up for work assignment, other than
that specifically covered by the Office Audit Programme
h Were the requirements of assignment duly explained to the Audit Assistants,
particularly as regards:
i)the Audit Programme and its coverage; and the requirements that
the items verified be acknowledged by signatures
ii) procedures for making enquiries/ taking observations/comments/
evidence (and its examination)
iii) the manner of recording their observations for review by the
Partner In Charge
i Has each item in the Audit Programme /Check List been signed by
the person responsible for the work assignment
j Are all the work papers/evidence of work executed by each Audit
Assistant, on record and duly authenticated by such person
k Are all audit observations taken by each person on record
l Were there any major issues identified in the course of audit/
checking and have these been separately listed for disposal
If answer is YES:
i)Whether resolutions to the above were satisfactory/evidenced by management
representations/evidence
ii) Refer Page Nos. at which these appear (Page Nos._______)
m . Has the information furnished by Management in response to the following reports
been authenticated by Management; and examined before audit
verification/authentication:
i) Tax Audit Report
ii) Any other report (specify)
n Have all observations/ comments/evidence taken in the course of audit, been duly
reviewed by the Audit In charge; and incorporated in the requisite reports:
i) observations of a qualificatory nature, if material (in the Main Report)
ii) observations of a clarificatory nature and other items (including
non-material qualificatory) in the LFAR
iii) observations in response to the Tax Audit Report
Date: _________________________
(Signatures - Audit In Charge)
PRINTING INSTRUCTIONS - (From CD)
A. Printing should be done on A4 SIZE PAPER as spacing is set accordingly
B. Printing of the Material should be done in sequential order of the files as numbered
FILE NO FILE NAME PAGES

01A-A12 BANK – LETTERS 1-41
13B Letter to Branch Management for year end verification 1
01 C AUDIT PROGRAMME 1
01 Ca AUDIT PROGRAMME 2-35
01 Cb Notes and Instructions (Inverse of Programme) C II to XXXV)
02 C1 Selection of advances accounts for audit verification 36
03 C II- Common Adverse Features 37-40
04 C II.1 Auditor's analysis of observations in Annexure III 41
05 C II.1.1 Summary of Adverse Observations 42
06 C II.2 Summary of Adverse Features 43
07.C.II.3 MOC for changes in Advances 44
08 C III Audit in EDP Environment 45-48
09 C IV Movement of Advances (Branch to Main B/S) 49-50
10 C,IIC, 12C,13C ALM 51-60
14 CC Management Representation Letter (Illustrative) 1-6
01 D. D.1 D.2,D.3 Report of the Branch Auditor... 1-12
02 D.4 Report of the Branch Auditor. 13-15
03.D.4 ILLUSTRATIVE PARAS OF THE REPORTS 16-26
04.D5.1.1 MOC for changes in Advances Classification 27
05 D.5.1.2 MOC Advances...Reasons for Changes 28-29
06 .D.5.1.3 MOC for other than Advances 30
07.D.5.1.4 Interest verification 31
08 D.L.1 LFAR reporting 32-55
08 D.L.2 - Recommended additional matters for LFAR 56-58
09 D.L.2.1 LFAR Illustrative Paras 59-64
01 E PRUDENTIAL (IRAC)NORMS 1-27
02 E I SMA / JLF 28/34
03 E II PRUDENTIAL NORMS 35-37
04 E III PRUDENTIAL NORMS 38-46
05 E IV PRUDENTIAL NORMS 47-62
F-F.I-F II - Accounting and Auditing Standards 1-4
G Internal Controls -Risk Based Audit 1-4
H Basic Analytical Reviews 1
I Master Circulars and Other Circulars of RBI 1-6
J Broad Guidance to Auditors on additional work re Frauds 1-30
K Disclosure Items for banks 1-2
K.1 RBI Disclosure requirements 3-21
L Ghosh Jilani Committee Report 1
M Important Provisions of the Banking Regulation Act 1-5
N Abbreviations used in Banking Industry 1-9
O FCNR(B) DEPOSITS - MANNER OF COMPUTATION 1-2
OF INTEREST
P Computation of Drawing Power 1-2
Q Gold Monetisation Scheme – Brief Note 1-6
R Trade Credits for Imports in India – Brief Note 1-2
S INTERNAL PEER REVIEW CONFIRMATION 1

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BANK BRANCH AUDIT

CA. M.M KHANNA CA. SANJAY VASUDEVA

NORTHERN INDIA REGIONAL COUNCIL

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The objective of the background/reference material is to enable branch statutory auditors to be

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The audit exercise should involve the following:

a) Banking Regulation Act 1949 For important provisions

Audit procedures need to be performed based on

 Standards on Auditing on Audit Conclusions  SA 700 Forming an Opinion

d) Auditor’s responsibilities in relation to frauds/ Refer SA 240 -The

Refer Section K and K.1

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g) Knowledge of the nature and type of branch

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activate their app without visiting a Branch or ATM accounting norms /

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i) Figures in the year end financial statements To account for any

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m) Significant Accounting Policies of the Bank, The auditor should

n) Previous/latest reports on the audit of the branch Refer Section A Annexure

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Centralisation and physical location of original

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c) Examination of the daily exception reports, both This is on the presumption

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Advances under Restructuring, rehabilitation,

ii. Accounts maintained in EDP environment:

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e) Interest Income/Expenditure: Questions are often asked

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If Management representation / Response is In preparing his report, the

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In the EDP environment, it is imperative that Refer Section C III

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b) Long Form Audit Report (LFAR) Refer Section D.L, D.L.1,

c)Tax Audit Report:

d) Other Certificates/ attestation:

6 Internal Peer Review: Refer Section S.

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CA.M. M. KHANNA & CA. SANJAY VASUDEVA

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March __, 2018

Management’s Responsibility for the Financial Statements:

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We shall appreciate your co-operation in the matter.

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4. Accounts, if maintained on Computer/ in the EDP environment:

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Annexure I to letter dated March __, 2018 (Contd.)

6. Balance(s) with other Banks(including RBI/SBI):

Centralised Advances Processing Cells/Centres

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e) Valuation/market value of tangible Assets:

iv) Refinancing of Project Loans (refer Item 20 of Annexure IA)

vii) Post-restructuring classification:

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h) Devolved Letters of Credit(LCs)/ co-acceptances, and guarantees:

9. Provisions/Liabilities remaining unadjusted against corresponding advances:

c) Amount at credit unappropriated Rs._____ #Rs.