Summary of Important Circulars for Bank Branch Audit (FY 2019-20-PSB/SCB Bank Branch)

Brief Background:

The Reserve Bank of India (RBI) at frequent interval issues various circulars/notifications/guidelines applicable to all the regulated entities viz. Scheduled Commercial Bank’s (SCB’s), Regional Rural Banks (RRB’s), Non-Banking Financial Companies (NBFC’s) etc. These relevant guidelines can be obtained from /Notifications/Master Circulars/Master Directions etc.

In the earlier period, the RBI had a practice of issuing the Master Circulars on various subject matter in month of July every year. These Master Circulars were issued primarily for two reasons; (a) compiling all the relevant circular/notifications issued in the relevant period and (b) any new guidelines to be amended in the scope of the Master circular. However, this practice has been discontinued since few years and there is no ready source available to refer all the circulars issued in particular period on a particular subject matter.

Hence, inclusion of such chapter compiling all the important circulars in this publication is important from the perspective of the Bank Branch Auditor.

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  • Scope of the paper:

The paper deals with the circulars/notifications issued by the RBI other than the Master Directions/Master Circulars issued on various subject matters. The Master Circular and Directions can be referred on the RBI website. The listed circulars/notifications deal with the specific area of operation which are relevant from the perspective of the Bank Branch Auditor (BBAR).

The paper also covers some brief audit procedures which can be performed while conducting the Branch Audit to verify the compliance of these circular. The paper covers all the relevant circulars issued between the periods 1st March 2019 to 15th February 2020.

The paper excludes from its scope the circulars/notifications which are mainly from the perspective of Statutory Central Auditors (SCA’s) for e.g. Prudential Framework for Resolution of Stressed Assets (High exposure), Disclosure in the “Notes to Accounts” to the Financial Statements – Divergence in the asset classification and provisioning etc.

  • Summary of some important circulars issued by RBI:
Subject Brief details *
Priority Sector Lending –Lending by banks to NBFCs for On-Lending

Date: August 13,2019

RBI Reference: –

RBI/2019-20/39 FIDD.CO.Plan.BC.7/04.09.01/2019-20

In order of ongoing credit crisis for NBFC, the circular provides that bank credit to registered NBFCs (other than MFIs) for on-lending will be eligible for classification as priority sector. This benefit is available to the banks subject to the following condition;

Class of Borrower Limit on Lending by NBFC
Agriculture For ‘Term lending up to ₹10 lakh per borrower
Micro & Small enterprises up to ₹20 lakh per borrower.
Housing to ₹20 lakh per borrower.

Other important point relating to this is as follows:

• Banks can classify only the fresh loans sanctioned by NBFCs out of bank borrowings, on or after the date of issue of this circular.

• The above benefit is available upto 31st March 2020. However, loans disbursed under the on-lending model will continue to be classified under Priority Sector till the date of repayment/maturity.

Role of BBAR:

From previous year a specific certificate needs to be issued by the SCA’s with respect to the correct classification of the loans under priority sector across various categories at the branches.

The SCA’s mainly audit the Top-20 branches of the banks and hence the compliance of the above need to be mainly verified by the bank branch auditor.

The auditor should verify the compliance of the conditions laid down by the above circular on sample basis and also should inquire with the branch manager about the compliance of the same.

Levy of Foreclosure Charges /Pre-payment Penalty on Floating Rate Term Loans

Date: August 02,2019

RBI/2019-20/29 DBR.Dir.BC.No.08/13.03.00/2019-20

In terms of earlier guidelines, the banks are not permitted to charge foreclosure charges / pre-payment penalties on home loans / all floating rate term loans sanctioned to individual borrowers.

This benefit has been extended to all the loans availed by the individual borrower other than for business purpose.

Role of BBAR:

The branch auditor should ensure the compliance of the above circular as the non-compliance of the same may lead to penal consequences on the bank by the regulatory authorities.

Concurrent Audit System

Date: September 18, 2019

RBI Reference: –

RBI/2019-20/64 DBS.CO.ARS.No.BC.01/08.91.021/2019-20

The main highlight of the circular is as follows:

• Amendment to the guidelines issued on 16th July 2015 w.r.t. Concurrent Audit System;

• Review of effectiveness of concurrent Audit- evaluation of performance of concurrent auditor by Audit Committee;

• Minimum Areas covered under Concurrent Audit- specifically identified and listed; (13 areas identified by RBI)

• Loans & Advances including physical verification of securities, delegation of Powers for sanction, Security Charge Creation, end use verification of funds, monitoring of accounts with excess drawings, monitoring of projects, etc.

Role of BBAR:

The Branch auditor should review the report of the concurrent auditor and should evaluate the compliance of the above circular. In case of any inconsistencies should be highlighted in the respective part of the LFAR.

IRAC Norms pertaining to Advances-Project Under Implementation

Date: February 07, 2020

RBI Reference: –

RBI/2019-20/158 DOR.No.BP.BC.33/21.04.048/2019-20

Based upon the recent downturn in the real estate industry the regulator has decided to give further relaxation for non-infrastructure projects and commercial real estate (CRE). The brief details of such relaxation are as follows:

• CRE projects beyond the control of promoters, banks may restructure them by way of revision of DCCO up to another one year and retain the ‘standard’ asset classification if the account continues to be serviced as per the revised terms and conditions under the restructuring.

• Revised repayment schedule is extended only by a period equal to or shorter than the extension in DCCO.

Other details regarding the above restructuring are detailed in the text of circular.

Role of BBAR:

In case the branch has any such exposure which has been restructured as per the above circular, the auditor should critically verify the compliance of various term and conditions listed therein.

One of the critical conditions to continue the account in “Standard category” is that the application should be received within the prescribe time limit and at the time of restructuring the account should be standard asper the record of recovery.

Micro, Small and Medium Enterprises (MSME) sector – Restructuring of Advances

Date: February 11, 2020

RBI Reference: –

RBI/2019-20/160 DOR.No.BP.BC.34/21.04.048/2019-20

In continuation of various benefits/relaxation available to the MSME borrowers, this circular permit a one-time restructuring of existing loans to MSMEs classified as ‘standard’ without a downgrade in the asset classification, subject to the following conditions:

a) The aggregate exposure, including non-fund-based facilities, of banks and NBFCs to the borrower does not exceed Rs. 25 crores as on January 1, 2019 2020.

b) The borrower’s account is in default but is a ‘standard asset’ as on January 1, 2019 2020 and continues to be classified as a ‘standard asset’ till the date of implementation of the restructuring.

c) The borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration.

d) The restructuring of the borrower account is implemented on or before March 31, 2020 December 31, 2020.

e) Post-restructuring, NPA classification of these accounts shall be as per the extant IRAC norms.

f) Provision of 5% in addition to the provisions already held, shall be made in respect of accounts restructured under these instructions.

Further, the RBI has also clarified that the eligibility for restructuring without GST-registration, as per the circular under reference, should be determined on the basis of exemption limit obtaining as on the date of the aforesaid circular, i.e., January 1, 2020.

It is clarified that accounts which have already been restructured in terms of the circular dated January 1, 2019 shall be ineligible for restructuring under this circular.

Role of BBAR :

The branch auditor should be diligent in verification of the restructuring of these loans given to the MSME borrower. The auditor should specifically verify the eligibility of the borrower selected for implementing the restructuring package. Since the MSME loans are primarily disbursed through branches covered by the branch auditor, the responsibility on the branch auditor towards the compliance of the same increases many folds.

Further, the auditor should also ensure that the earlier cases of restructuring are not considered under the above circular.

Priority Sector Lending – Classification of Exports under priority Sector

Date: September 20, 2019

RBI Reference: –

RBI/2019-20/66 FIDD.CO.Plan.BC.12/04.09.01/2019-20

In order to boost credit to export sector, the Reserve Bank of India has increased the following limit:

• Enhance the sanctioned limit, for classification of export credit under PSL, from ₹ 250 million per borrower to ₹ 400 million per borrower.

• Remove the existing criteria of ‘units having turnover of up to ₹ 1 billion’

Role of BBAR :

As discussed above, the branch auditor should verify the correct classification of the above exposure under the priority sector advances. The branch auditor should also specifically identify the instance of non-classification of any exposure as Priority Sector and should highlight the bank for immediate correction. The auditor should specifically specify any instances of non-compliance in its certificate on PSL.

Interest Subvention Scheme for MSMEs

Date: February 5, 2020

RBI Reference: –

RBI/2019-20/155 FIDD.CO.MSME.BC.No.17/06.02.031/2019-20

The Ministry of MSME (MoMSME) has decided that a new scheme viz. “Interest Subvention Scheme for Incremental credit to MSMEs 2018” will be implemented over 2018-19 and 2019-20. The Reserve Bank of India has modified certain operation guidelines;

• Submission of statutory auditor certificate by June 30, 2020 and in the meantime, settle claims based on internal / concurrent auditor certificate.;

• Acceptance of claims in multiple lots for a given half year by eligible institutions.

• Requirement of Udyog Aadhar Number (UAN) may be dispensed with for units eligible for GST. Unit not required to obtain GST, may either submit Income Tax Permanent Account Number (PAN) or their loan account must be categorized as MSME by the concerned bank.

Role of BBAR :

The Bank branch auditor roles and responsibility increases as the subvention scheme will be applicable to 90% of the branches covered by the bank branch.

The branch auditor should also verify the certificate submitted by the concurrent auditor or internal auditor for the settlement of the claims.

The branch auditor should test each of the parameters like for e.g. eligible borrower, eligible facility, class of borrower etc. to determine the compliance of the above.

The branch auditor should also verify control around the determination of such claims which also include inquiring with the management whether the claim is computed manually or through system. These aspects will decide the nature, time and extend of audit procedures to be performed by the branch auditor.

(*Please refer full text of circular for more details and guidance)

  • Conclusion:

The Government & the RBI has continued various relaxation in the form of additional days in past due criteria, interest subvention schemes for domestic as well export manufacture, restructuring scheme etc. The MSME borrowers accounts for approximately more than 50% of the advances at the branch, in light of the same the roles and responsibility of the branch auditor has increased further as compared to earlier period.

The above are certain important circulars/notifications which should be looked at by the Branch Auditor with professional skepticism. The Bank Branch Auditor should also go through the circulars applicable to the specific branches such Foreign Exchange Branches etc. The auditor should also go through the relevant Master Circulars/Master Directions/Other Circulars issued by the Reserve Bank of India from time to time.

Wish you all a very Happy Season of Bank Branch Auditing!!!!!!!!!!!!

Author Bio

Qualification: CA in Job / Business
Company: CNK & Associates LLP
Location: Mumabi, Maharashtra, IN
Member Since: 29 Feb 2020 | Total Posts: 1

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