Knowing the Business of the Bank Branch: According to the SA 315*, The Auditor shall understand the business of the branch, how the activities of banking are being performed, Not only knowing the basic deposits and withdrawals of the bank but also the online accounts transactions and other digitalised activities and also assets of the Bank.
The Auditor shall document the process to be performed in a form whether in paper or in a digital way.
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Audit Documentation
The Auditor while performing the Audit, shall document each and every necessary findings and other crucial information with him/her. The documented information is the only proof that they had conducted the Audit and what finding they got while performing audit procedures.
Non-Performing Assets (NPA)
Meaning
NPAs are the major assets bank holds. Now, NPA is an asset which has been kept as a security by the customer who avails the loan facility and defaulted to repay the installments. Hence, that security which customer keeps with bank becomes a NPA for the bank.
The word NPA itself enlights the meaning i.e. Non Performing, meaning the Asset is not performing the purpose for which it has been kept with bank or its title deeds.
Now, When Asset becomes NPA ?
A) Thee bill remains overdue for a period of more than 90 days in case of bills purchased and discounted.
B) a non performing asset (NPA) is a loan or an advance where interest and / or instalment of principal remains overdue for a period of more than 90 days for a term loan.
C) The account remains ‘out of order’ in respect of an Overdraft / Cash Credit (OD or said as CC)
D) The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops in case of Agricultural advances given.
E) The amount of liquidity facility remains outstanding for more than 90 days for of a securitization transaction undertaken in terms of guidelines on securitization dated 01 Feb 2006.
F) The instalment of principal or interest thereon remains overdue for one crop season for long duration crops in case of Agricultural advances.
Classification of Bank Advances
After determine the NPA list of advances, bank shall to classified their advances assets into four category standard, sub standard, Doubtful and loss to make provision on the same. Auditor has to check the provisioning and other transactions related to NPA.
A) Standard advances :
Standard assets are advances by the banks which have consist of No risk to the banks. Like accounts which is not an NPA, account which are NPA but guarantee given by the C.G.
B) Sub standard assets :
Substandard assets are those assets which are previously NPA for period of less than or equal to 12 months.
C) Doubtful Assets :
Doubtful Assets are those assets which are previously Sub standard assets for a period of less than or equal to 12 months
D) Loss Assets
In case of any fraud occurs, banks will classifieds it to the loss assets.
Hence, these are the actual classification of NPAs.
Provisions to be made for NPAs
A) Standard advances
a) Advance given to Agriculture and SME = 0.25%
b) Advance given to real estate sector = 1%
c) Advances other than agriculture/SME and real-estate = 0.40%
B) Sub standard assets = 10% of total outstanding advances amount
C) Doubtful Assets
a) Upto 1 year = 20%
b) Between 1 – 3 years = 30%
c) More than 3 years = 100%
D) Loss assets 100 %
Therefore, Above is the basic procedure of initiating the Bank Branch Audit and knowing and performing procedures for focusing majorly on NPAs.
Also , The Auditor has to apply basic audit procedures and core of his/her learnings and experiences for the Audit which will be very important to perform the Audit.
* ( SA 315 : Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its. Environment )
Conclusion
Understanding the business of bank branches, particularly concerning NPAs, is imperative for auditors. By adhering to SA 315 guidelines and applying core audit principles, auditors ensure thorough and effective audits. Through meticulous documentation and adherence to classification and provisioning norms, auditors contribute significantly to maintaining the financial health and integrity of banking institutions.
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