Bank Branch Audit Basics and Overview

STATUTORY BANK BRANCH AUDIT BASICS AND OVERVIEW CA Ritesh Agarwal Partner, S. Jaykishan

KEY ISSUES Huge volume- complex working Specialized knowledge Limited time Audit risk Knowledge gaining Audit team composition Audit Audit planning Documentation CA Ritesh Agarwal, S. Jaykishan

BANK BRANCH AUDIT Includes the following reporting :- Audit Report with Observation Report Long Form Audit Report (LFAR) & Annexure Tax Audit Report Jilani Committee Recommendations Ghosh Committee Recommendations Certifications IRAC Norms & MOC Physical Verifications CA Ritesh Agarwal, S. Jaykishan

Type of Facilities - Fund Based & Non - Fund Based Type Of Fund Based Advances Demand, Term Loan, CC, OD Type of Non-Fund Based Advances - BG /LC / Bills Advances AUDIT OF LOANS & ADVANCES Credit Appraisal Sanction/Disbursements Documentation Review, Monitoring & Supervision CA Ritesh Agarwal, S. Jaykishan

APPOINTMENT FORMALITY & PLANNING Appointment Letter from Bank Reply to Appointment Letter NOC received from Previous Auditor Partner/Proprietor Declaration submitted to Bank Audit Programme indicating the Areas allocated[Bank Branch Audit Programme in the GN on Bank Audit can be considered as base] Details of team member indicating the experience[To reflect the proper mix of junior and senior staff] Agenda of Meeting with Branch Manager and Minutes of Meeting with the Manager CA Ritesh Agarwal, S. Jaykishan

VERIFICATION OF ADVANCES Loan MIS as on Cut-off Date along with List of New files sanctioned Sample Selection work paper [indicating the various parameter adopted for selecting the samples] Comprehensive Checklist of Verification of Advances Query sheet shared with Branch Manager CA Ritesh Agarwal, S. Jaykishan

VERIFICATION OF NON - PERFORMING ASSETS List of NPA Accounts as on Cut-off date Sample Selection work paper [indicating the various parameter adopted for selecting the samples] NPA Provision Work paper List of Diversion observed and List of Cases with inadequate Provision Issue Memorandum- Advances shared with Branch Manager CA Ritesh Agarwal, S. Jaykishan

OTHER AREAS OF AUDIT & CERTIFICATION OF ANNEXURES Cash Balance/ ATM Balance/ Bank Balance with Other Bank certificates Analytical Review of major items of Balance Sheet and Profit & Loss Account Work paper listing Various Annexures/Certificates issued along with the work done and nature of audit evidences obtained against each of these certificates Fixed Asset Schedule including Verification Report Issue Memorandum- Other Areas shared with Branch Manager CA Ritesh Agarwal, S. Jaykishan

AUDITORS REPORT, LFAR & MOCS Master Sheet for all the query/observation raised in Branch Audit Master Audit Audit Evidences for the information/facts stated in LFAR List of MOC's suggested at the Branch along with Supporting working/documentary evidences List CA Ritesh Agarwal, S. Jaykishan

Final Signed Copy of the Financial Statement along with Auditors' Report FINAL ANNEXURES & OTHER REPORTS Signed copies of various annexures and certificates Management Representation Letter CA Ritesh Agarwal, S. Jaykishan

ADVANCES VERIFICATION Extent of verification SBA should obtain the entire Loan Book & select a reasonable sample for verification. Large Advances 10% of total advances at the branch or Rs 10 Crore whichever is lower to be verified 100% Top 5 Standard Accounts Adverse Comments, if any Each Type of Loan should be selected for verification while taking samples List of Accounts examined to be enclosed The auditor may comment upon the relevant aspects generally, along with instances of situations giving rise to his reservations or adverse remarks. CA Ritesh Agarwal, S. Jaykishan

Quick Mortality cases (within 12 Month NPA) Interest rate not correctly charged Credit facilities sanctioned beyond Delegated Authority Loans disbursed without complying Terms & Conditions of sanction Non-execution of necessary documentation Non-registration of charges FOCUS AREAS Lien is not created on deposits Correct & Valid Rating is not Updated. Renewal / Review pending Frequent Short Renewal /Review - report cases Stock / Book debt & Other Operational Data QMR/ HYR Red Flagged Accounts CRILC Reports CA Ritesh Agarwal, S. Jaykishan

KEY DOCUMENTS TO BE REVIEWED Identify the list of Advances where the following is yet to be obtained : Audited Financial Statement Inspection Report Stock Audit Insurance Additionally, identify the advances where - System of classifying SMA - 0, SMA - 1, SMA - 2 Overdrawing in accounts above sanctioned limits Upgradation of Non-Performing Assets Valuation Report older than 3 years CA Ritesh Agarwal, S. Jaykishan

A Non-Performing Asset is a loan or advance where in case of Cash Credit / Overdraft accounts : The account remains 'out of order' as indicated in paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC) NPA Norms - "Out Of Order" - Para 2.2 Account should be treated as "Out Of Order" if 1. Outstanding continuously in excess of Sanction Limit or Drawing Power Limit for 90 Days; 2. In case where Outstanding Balance is less than Sanctioned Limit / DP Limit, but there are i. No Credit continuously for 90 days, or ii. Credits are not enough to cover interest debited during the previous 90 days period NPA NORMS - CASH CREDIT / OVERDRAFT Balance remains CA Ritesh Agarwal, S. Jaykishan

A Term Loan becomes NPA - when interest and/or instalment of principal remain overdue for a period of more than 90 days Understanding Instalments - without Interest or EMI Obtain SMA Report from the bank Recovery of EMIs Compare Theoretical balance with ledger balance EMI not properly assessed CBS Parameters Moratorium period, interest flag, EMI, etc. NPA NORMS TERM LOAN CA Ritesh Agarwal, S. Jaykishan

ACCOUNTS WITH TEMPORARY DEFICIENCIES (PARA 4.2.4) The classification of an asset as NPA should be based on the record of recovery. A bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature: 1. Non-Availability of adequate DP on the latest Stock Statement 2. Balance Outstanding temporarily 3. Non-submission of Stock Statement (In case of Large Borrower Max 180 days, in other cases 90 days) 4. Non-renewal of limits on due date (If not reviewed / renewed within 180 days - then NPA) exceeding the limit CA Ritesh Agarwal, S. Jaykishan

NPA ACCOUNTS AUDIT APPROACH List of upgraded accounts during the audit period - check upgradations - IRAC Norms NPA List as on 31.03.2024 and NPA List as on 31.03.2025 List of new accounts added as NPA during the year: Check NPA date Asset Classification Reversal of Unrealized Interest Take Audit sample - for upgradation and newly added accounts test the same for Norms CA Ritesh Agarwal, S. Jaykishan

NPA ACCOUNTS AUDIT APPROACH Take SMA Reports for December, January & February months BG Invoked list LC Devolved list List Bill of Discounted under LC List Of Restructuring Accounts List of Stock Statements Not Submitted List of Accounts non renewed or reviewed Review Audit Reports - large Accounts and accounts having Inherent Weakness CA Ritesh Agarwal, S. Jaykishan

NPA ACCOUNTS AUDIT APPROACH Review Performing Assets Classify Advances 1. CC/OD 2. TL 3. Agriculture Advances 4. Staff Advances List of Samples Using Excel Sorting Adverse Balances Strata wise Poor turnovers Other Audit Approach Samples Scrutinize Account Statements Files Verification CBS Parameters Discussion with Manager Finalisation of MOC Exact Date of NPA Interest Reversal Security CA Ritesh Agarwal, S. Jaykishan

INCOME RECOGNITION & REVERSAL OF INCOME No income recognition on NPA Accounts TD / NSC / KVP / LIC Interest recognized subject to adequate margin Loan with moratorium period Reversal of Unrealised Interest current period as well as past period Reversal Of Unrealised Fees / Commission / Similar of Income current period as well as past period Appropriation of Recoveries in NPA Accounts Interest Realised on NPA Accounts Income Account CA Ritesh Agarwal, S. Jaykishan

ACCOUNTS REGULARISED NEAR ABOUT THE BALANCE SHEET DATE (PARA 4.2.6) Accounts with Solitary or Few Credit are recorded Before Balance Sheet Date Should Be Handled With Care & Without the Scope of Subjectivity Accounts indicate Inherent Weakness on the basis of data available, the accounts should be deemed as NPA Bank should furnish Satisfactory Evidences about the manner of Regularization of the Accounts & why it is shown as Performing CA Ritesh Agarwal, S. Jaykishan

NPA : SECURITY VALUE Less than 50% If value of security is less than 50% of value assessed by Bank at the time last inspection Asset Classification : Doubtful Less than 10 % Value of security less than 10% of O/s balance Asset Classification : Loss CA Ritesh Agarwal, S. Jaykishan

Account should not be treated NPA - 1. 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. 2. Central Government guaranteed advance to be classified as NPA only if Government repudiates the guarantee when invoked. NPA NORMS : EXCEPTIONS All facilities granted to a borrower shall be treated as NPA & not only that facility which has become irregular. Exceptions - Credit facility to Primary Agricultural Credit Society (PACS) and Farmers Service Societies (FSS) under on lending arrangement; Bill Discounted against accepted LC i. ii. CA Ritesh Agarwal, S. Jaykishan

NPA NORMS : CERTAIN KEY ISSUES LC Devolved & BG Invoked kept in Separate Account Upgradation Of NPA Accounts. (Para 4.2.5 ) Review vs Renewal Issues Fraud Cases NPA Accounts - Security Value Issues Bill Discounted under LC Exact Date of NPA Consortium Finance Advances Ag TD, NSC, IVP, KVP, LIC Adequate Margin Erosion in Value Of Security CA Ritesh Agarwal, S. Jaykishan

Drawing Power Limit Not Computed Properly Bank Stock Statement Availability Dummy Credit Entries Through Office Accounts Ad-hoc Sanctions NPA NORMS : CERTAIN KEY ISSUES Recoveries After 31/03/2025 Stock as on 31/03/2024 & Stock as per Audited Balance Sheet Connected Parties Accounts NPA Status, NPA Date, Security Valuation Stock Audit Gold Loan Issues Bullet Repayments CA Ritesh Agarwal, S. Jaykishan

AGRICULTURE NPA : IMPORTANT ISSUES SLBC Guidelines Crop Season in India / respective State, Cropping Pattern in the Area. Farm Credit (Annex 2, IRAC Norms) Restructuring Of loans - Natural Calamities. Interest Application in Agri. Advances . Exact NPA Date. CA Ritesh Agarwal, S. Jaykishan

Stages Of Restructuring No Retrospective Alteration to Loan Agreement Acceptance Borrower Financial Viability Asset Classification Golden Rule Additional Provisions 5% Repeated Restructuring Failed Restructuring RESTRUCTURING - GENERAL PRINCIPALS CA Ritesh Agarwal, S. Jaykishan

PROFIT & LOSS ACCOUNT Discrepancies in Interest paid & Received Review Revenue Audit Reports Compliances with IRAC Norms Check Interest Reversal in NPA Accounts Provision for Interest Accrued on overdue / matured Term Deposits Divergent Trends in Major Items of Income & Expenditure Compare PL with Last Year - Ratios & Trend Analysis P&L Vouching Verification - Bills / Quotations CA Ritesh Agarwal, S. Jaykishan

PROFIT & LOSS ACCOUNT Capital / Personal Expenses Debited to PL Prior Period Expenses Debited to PL TDS Deduction on All Expenses Cash Expenses above Rs 10,000/- Obtain Revenue Audit / Income leakage Report Test Check - Interest / Commission / Fees / Penal Interest - Properly Charged If Any Revenue Leakage MOC IRAC Norms - Reversal of Unrealized Interest CA Ritesh Agarwal, S. Jaykishan

Once closing done, no changes are permissible at the branch Level. MEMORANDUM OF CHANGES (MOC) Any change in Financials or Asset Classification can be done through MOC Only. MOC Affecting P/L & B/S MOC affecting Assets Classification (IRAC Norms) CA Ritesh Agarwal, S. Jaykishan

100% Accuracy Large no of Certification Specific Areas Confirm the Source data for Certification Obtain RBI Circular / HO Guidelines Avoid Clerical Mistakes Ensure All Copies are duly Filled & Signed Obtain MRL, if required CERTIFICATION WORK CA Ritesh Agarwal, S. Jaykishan

AREAS MAJORLY COVERED IN LFAR Assets Liabilities Profit & Loss Account General CA Ritesh Agarwal, S. Jaykishan

ASSETS Cash Balances with RBI, SBI & Balances with Other Banks Money at Call & Short Notice Investments Advances Other Assets CA Ritesh Agarwal, S. Jaykishan

CASH Cash Retention Limit & Excess Cash Balance Held by the Branch. Insurance of Cash on Hand & Cash in Transit. Surprise Cash Verification Custody of Cash CA Ritesh Agarwal, S. Jaykishan

2. BANK BALANCES Take list of Bank Accounts held by the bank Obtain Balance Confirmation Certificate as on year end Match bank statement with GL head, if difference, obtain reconciliation Review Reconciliation Un-responded Cash Entries Revenue Item Requiring adjustment or W/Off Old Outstanding Balances-Aging Any Item Special Attention CA Ritesh Agarwal, S. Jaykishan

3. MONEY AT CALL & SHORT NOTICE Confirm any such type of transactions HO Guidelines and Instructions CA Ritesh Agarwal, S. Jaykishan

4. INVESTMENTS If Branch holds any Investment Physical Verification Income Accrual Matured/Overdue Investments HO Instructions and RBI Guidelines CA Ritesh Agarwal, S. Jaykishan

5. OTHER ASSETS Stationery & Security Items Physical Verification Internal Control over Issue & Custody Suspense Accounts/Sundry Assets Age wise bifurcation - Reasons for delay in adjusting Provisions Required Take list as on 31.03.25 Compare with Last Year Obtain Ledgers Test Check Unusual Movement. Nature & Amount Involved. CA Ritesh Agarwal, S. Jaykishan

II. LIABILITIES Deposits Other Liabilities Contingent Liabilities CA Ritesh Agarwal, S. Jaykishan

1. DEPOSITS Inoperative Accounts Check how account is Flagged as Inoperative By System. Obtain List Of Inoperative Account & Verify Transaction on Test Check Basis Take List Of Accounts Activated as Operative -Confirm With Bank Policy. Unusual Movement at Year End Take Monthly Average Deposit Figures Compare Average with Year End Balances Compare Year End Balances with Balances as on Audit Obtain Manager Representation for unusual movement & Comment accordingly Overdue / Matured Term Deposit Take CBS System Figures for Overdue Matured Term Deposit Check Interest Provision at Year end Minimum Balances Requirement/ Charges CA Ritesh Agarwal, S. Jaykishan

2. OTHER LIABILITIES : BILLS PAYABLE, SUNDRY DEPOSITS The number of items and the aggregate amount of old outstanding items pending for three years or more may be obtained from the Branch and reported under appropriate heads. Does the scrutiny of the accounts under various sub-heads reveal old balances? Does your test check indicate any unusual items or material withdrawals or debits in these accounts? If so, report their nature and the amounts involved. Obtain List from Branch as on 31.03.2025. Compare with Audited List as on 31.03.2024 Obtain ledger from Branch for transactions. Test Check Transaction During the year. Comment if Unusual items / withdrawals. CA Ritesh Agarwal, S. Jaykishan

3. CONTINGENT LIABILITIES List of major items of the contingent liabilities (other than constituents' liabilities such as guarantees, letters of credit, acceptances, endorsements, etc.) not acknowledged by the branch; possible but not probable Review Last Year Audit Report for Any Contingent Liability. Confirm Any Activity during the Year. Review Correspondence with lawyer/ others. Review Subsequent Events also Provision for Liability. Ex. Suit filed against Bank CA Ritesh Agarwal, S. Jaykishan

GENERAL Gold Loan Bags Verification / Records Internal Control Over Security Items Report Missing / Lost Items Books & Records - Other Software Exceptional Reports /IS Audit Inter Branch Accounts Frauds - Reporting to RBI Potential Risk Areas Early Warning System Implementation of KYC / AML Guidelines -RBI Circular / HO Policy / Response to HO Alerts / Concurrent Audits Management Information System - Data Input / Manual Intervention / Other Software. CA Ritesh Agarwal, S. Jaykishan

MISCELLANEOUS Last Year LFAR Internal / Concurrent Audit Reports Credit Audit Report Stock Audit RBI Inspection Income & Expenditure Audit IS Audit Any Special Investigation Any Other matter - to be Report to SCA. CA Ritesh Agarwal, S. Jaykishan

25 Questions in Report Answers - Implemented / Not Implemented Only. JILANI COMMITTEE RECOMMENDATION It includes recommendation applicable at Branch / RO / HO level. Negligence of auditor - may be held accountable. CA Ritesh Agarwal, S. Jaykishan

51 Questions in Report Answers - Yes / No Only. GHOSH COMMITTEE RECOMMENDATION Main Objective of this report is to ensure existence of Proper System Negligence of auditor - may be held accountable Being its fact statement, suggested to attach our examination report on sample basis. CA Ritesh Agarwal, S. Jaykishan

PHYSICAL VERIFICATION Cash in Hand Cash at ATM Tokens Gold Bags Stationary & Security Items - DD, Cheques, PO , Adhesive Stamps, Postage Stamps Fixed Assets Investments CA Ritesh Agarwal, S. Jaykishan

PARA 5.3.3 STOCK AUDIT & COLLATERAL VALUATION FOR NPAS OF 25 CRORE & ABOVE Stock Audit by External Agencies Banks are Required to conduct annual stock audits by external agencies as per bank guidelines approved by Board of Directors. Valuation of Immovable Properties Collateral like immovable properties charged in favour of banks must be valued once in three years by qualified valuer CA Ritesh Agarwal, S. Jaykishan

The circular emphasizes the need for :- Proper Valuation Due Diligence Transparency in Auctions Regulation of LTV and Interest Rates Internal Controls End Use of Monitoring GOLD LOANS RBI REFERENCE: RBI/2024- 25/77 Irregular practices in grant of loans against pledge of gold ornaments and jewellery by Banks and NBFCs. CA Ritesh Agarwal, S. Jaykishan

FAIR LENDING PRACTICE PENAL CHARGES IN LOAN ACCOUNTS RBI REFERENCE: 2023-24/53 The circular issued by RBI on 18th August 2018, however on 19th December 2023 with reference to this circular. The RBI issued Extension of Timeline for Implementation of Instructions with effect from 1st April 2024. RBI has issued various guidelines to ensure reasonableness and transparency in disclosure of penal interest. Under the extant guidelines, lending institutions have the operational autonomy to formulate Board approved policy for levy of penal rates of interest. The primary focus is on regulating and clarifying the application of penal charges, ensuring they are reasonable and properly communicated to customers. The Branch auditor should review the compliance of the above circular, including its lending practices and internal policies CA Ritesh Agarwal, S. Jaykishan