Audit 2015-Deposits–The Peripheral Aspects

CA Amresh Vashisht

When we go to audit the banking industry, we came to know which of the Banks must be treated with respect and which are in low water ,it simply add our responsibility to take cognizance of peripheral area of DEPOSITS. Deposits are peripheral areas of attention and due diligence while conducting and concluding the branch audits.

Banks are mainly having four types of deposit accounts, namely Saving Bank Accounts, Current Accounts, Recurring Deposits and Term/ Fixed Deposits.   However for the purpose of marketing, some banks have introduced new names such as 2-in-1 deposits, Smart Deposits, Power Saving Deposits, Automatic Sweep Deposits etc but all fall in a broader limit of these four types of deposit accounts. 

SAVING ACCOUNTS:

Saving accounts carries nominal interest which can only be used for personal purpose and are one of the most populist deposits .it’s the individuals and HUFs who can open saving accounts. Registered societies, not-for-profit companies and a co-operative society financed by the bank can open saving accounts but Institutions such as municipal corporations/committees, political parties, trade associations, panchayats and clubs can’t open savings accounts. Most of the banks have rules for the maximum number of withdrawals in a period and the maximum amount of withdrawal, but hardly any bank enforces these.  However, banks have every right to enforce such restrictions if it is felt that the account is being misused as a current account.

Wef ,25th October, 2011, RBI has deregulated Saving Fund account interest rates and now banks are free to decide the same within certain conditions imposed by RBI.

Area of concern:

a) KYC norms should be complied with. So examine a few of the documents relating to the savings accounts opened during the year. The documents should clearly establish the antecedents of the account holder to be identified by an old account holder of the bank.

b) Debit balance in saving account should be examined in detail and the outstanding exceeding 90 days should be provided for.

c) Accounts transfer from other branches followed by heavy transactions should be taken care of.

d) Examine unusual trend in account opening or account closing, dormant accounts that have suddenly been reactivated by heavy cash withdrawals or deposits, over drawings, etc.

e) Check whether proper mapping of accounts is done. For Instance linking of applicable interest rate table to SB (General), SB (Staff), SB (Pensioners) etc

f) TDS is not applicable on saving bank account.

CURRENT ACCOUNTS:

Current Accounts are basically meant for businessmen and are never used for the purpose of investment or savings.  These deposits are the most liquid deposits and there are no limits for number of transactions or the amount of transactions in a day.  Most of the current accounts are opened in the names of firm / company accounts.  No interest is paid by banks on these accounts.  On the other hand, a bank charges certain service charges, ledger page charges, sms facility charges. However, in recent times some banks have introduced special current accounts where interest (as per banks’ own guidelines) is paid .The current accounts do not have any fixed maturity as these are on continuous basis accounts.

Area of concern:

a) KYC norms should be complied with. So examine a few of the documents relating to the current accounts opened during the year. The documents should clearly establish the antecedents of the account holder to be identified by an old current account holder of the bank.

b) Debit balance in current account should be examined in detail and the outstanding exceeding 90 days should be provided for.

c) Accounts transfer from other branches followed by heavy transactions should be taken care of.

d) Ensure that debit balance in current account are not netted out on liabilities side but are included under head ‘advances’

e) Examine unusual trend in account opening or account closing, dormant accounts that have suddenly been reactivated by heavy cash withdrawals or deposits, over drawings, etc.

TERM / FIXED DEPOSIT RECEIPTS/ FCNR/NRE/NRNR:

All Banks offer fixed deposits with a wide range of tenures for periods from 7 days to 10 years. The term “fixed” in Fixed Deposits (FD) denotes the period of maturity or tenor. Therefore, the depositors are supposed to continue such Fixed Deposits for the length of time for which the depositor decides to keep the money with the bank.  However, in case of need, the depositor can ask for closing (or breaking) the fixed deposit prematurely by paying a penalty if prescribed.  In case of NRE and FCNR Accounts, the Branch should hold valid, current copies of the Passport and Visas of the account holders

Area of concern:

a) KYC norms should be complied with. So examine a few of the documents relating to the accounts opened during the year. The documents should clearly establish the antecedents of the account holder to be identified by an old account holder of the bank.

b) An FDR having matured but not en cashed should cease to earn interest at the rate contracted at the time of opening of the term deposit. It is no longer a term deposit. It should not earn interest more than the rate applicable on savings deposits viz. 4%. But many banks have a practice of renewing the FDRs with retrospective effect so that the customer does not lose out on the interest. But if the diktat of the RBI is to be followed to the letter, this can’t be done. Unless the customer comes forward on the appointed day viz. the date of maturity of the FDR and gets it renewed, the deposit should cease to be a term deposit and should earn interest only at the savings rate.

c) Kindly confirm having transferred Overdue/Matured Term Deposits to Current Account Deposit. If not, details/particulars of credit balances comprising Overdue/Matured Term Deposits as at the year–end which continue to be shown as Term Deposit, particularly where the branch does not have any instructions/communication for renewal of such deposits from the account holder and amount of provision of interest made on such overdue/matured term deposits, should be separately marked out.

d) To check whether auto–renewal of overdue TDRs has been enabled and comment whether report on such effective renewals and failures and on application of interest have been taken and scrutinized by the branch for correctness.

e) Examine unusual trend in account opening or account closing, dormant accounts that have suddenly been reactivated by heavy cash withdrawals or deposits, over drawings, etc.

f) Check calculation of interest on deposits.

g) To check whether various TDS rates linked to different types of depositors/ Other deductees have been verified for correctness in terms of TDS Rules and to see that all deposits have been linked to a customer-id for the purposes of TDS.

RECURRING DEPOSIT ACCOUNTS:

These are popularly known as RD accounts and are special kind of Deposits and are suitable for people who do not have lump sum amount of savings, but are ready to save a small amount every month. These can be open in single or joint names.  Under these types of deposits, the person has to usually deposit a fixed amount of money every month (usually a minimum of Rs, 100/- p.m.).   Any default in payment within the month attracts a small penalty.    However, some Banks besides offering a fixed installment RD, have also introduced a flexible / variable RD. Under these flexible RDs the person is allowed to deposit even higher amount of installments, with an upper limit fixed for the same e.g. 10 times of the minimum amount agreed upon. These accounts can be funded by giving Standing Instructions by which bank withdraws a fixed amount on a fixed date of the month from the saving bank and the same is credited to RD account.

Area of concern:

a)    KYC norms should be complied with. So examine a few of the documents relating to the accounts opened during the year. The documents should clearly establish the antecedents of the account holder to be identified by an old account holder of the bank.

b)    Examine unusual trend in account opening or account closing, dormant accounts that have suddenly been reactivated by heavy cash withdrawals or deposits, over drawings, etc.

c)     In case installment is delayed, the interest payable in the account will be reduced and some nominal penalty charged for default in regular payments if imposed.

d)   Premature withdrawal of accumulated amount permitted is usually allowed however, penalty if imposed for early withdrawals should be deducted while making payments.

e)    TDS is not applicable.

DORMANT / INOPERATIVE ACCOUNTS

Dormant means inactive and Inoperative means which is not being operated. An account is declared dormant after a bank has failed in attempts to contact the holder and/or; if it is unused for a stipulated period or no transactions have been undertaken recently.   In terms of RBI guidelines “A savings as well as current account should be treated as inoperative / dormant if there are no transactions in the account for over a period of two years”.   Further clarifying the issue RBI says  “for the purpose of classifying an account as ‘inoperative’ both the type of  transactions i.e., debit as well as credit transactions induced at the instance of customers as well as third party should be considered. However, the service charges levied by the bank or interest credited by the bank should not be considered”.  However, when the interest on Fixed Deposit account is credited to the Savings Bank accounts as per the mandate of the customer, it is treated as a customer induced transaction. Therefore, as per RBI guidelines; there is no difference between dormant accounts and inoperative accounts.

 Area of concern:

a)    To make a dormant/inoperative account an operative account again, the branch has to ensure that the KYC norms are fully complied with, before changing the status of the account.

b)    Verify if the specimen signature cards of dormant accounts are kept separately under joint custody of Manager/Officer.

c)     Any cash withdrawal/debits to Dormant account should be authorized by the Branch-in-charge.

d)   Inoperative accounts with substantial balances are susceptible to frauds and misappropriations. A print out containing the latest balances in all the inoperative accounts is to be taken. Examine unusual trend in dormant /inoperative accounts that have suddenly been reactivated by heavy cash withdrawals or deposits, over drawings, etc.

 DEPOSITS AUDIT-ABLE AREAS

a)    The debit balances in the current as well as savings account are shown as “Advances” and not netted off with the credit balances.

b)     If you encounter a customer in the non-eligible category operating a savings account, have the accounts designated as a current account and the interest credited in that account reversed.

c)     Provisions of Prevention of Money Laundering Act should be kept in mind to ensure that ‘suspicious’ transactions are reported to the concerned authority

d)   Credit card accounts with debit balances should be treated as loss assets, if they are outstanding for more than 90 days. Review the Master Circular on Maintenance of Deposit Accounts issued by RBI .

e)    Examine interest trends as compared to average annual deposits (monthly average figures)

SOME INSTANCES OF WINDOW DRESSING THROUGH DEPOSITS:

a)    The classic method of window-dressing that many branches may engage in: Debit Advance, Credit Deposit.

b)    Look out for a sudden spurt in advances/deposits at the year-end. The branch might well have done it at the behest of the borrowers/depositors themselves at the fag-end of the year. That does not let them off the hook, especially if the entry has been reversed on 01^st/2^nd

c)     Unused cash credit limits may be transferred to saving bank accounts or to overdrawn cash credit limits at year end and further reversal thereafter.

d)   Large amount of deposit accepted on last date and cheque still in clearing’

e)    Overdraft account allowed in one account and deposit account credited.

f)      Interest accrued and not due shown as deposit.

It is auditors’ responsibility to ensure that the bank operates in accordance with the regulations stipulated by regulator. It requires authentic reporting to regulator, it necessitates continuous monitoring of banking activities by us to ensure that no rules are breached and enforcement of regulatory rules makes them safe.