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PRESENTED BY. Shri M.K. Aggarwal Senior Partner M.K. Aggarwal & Co. Chartered Accountants. Long Form Audit Report & Capital Adequacy. Focus of Discussion. Structured Reporting System. Assets Cash & Bank balances. Money at call and short notice Investments Advances Other Assets

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presented by
PRESENTED BY

Shri M.K. Aggarwal

Senior Partner

M.K. Aggarwal & Co.

Chartered Accountants

slide5
Assets
    • Cash & Bank balances.
    • Money at call and short notice
    • Investments
    • Advances
    • Other Assets
  • Liabilities
    • Deposits
    • Other Liabilities
    • Contingent Liabilities
    • Profit & Loss Account
slide6
General
    • Books & Records
    • Reconciliation of control and subsidiary records
    • Inter-branch Accounts
    • Audit & Inspections
    • Frauds
    • Miscellaneous
  • Annexures
    • Applicable to specialized branches
    • To all branches having large / irregular / critical advances.
slide8
Balance Sheet disclosures.
  • Compliance of Accounting Standards.
  • Frauds.
  • Exposure Norms.
balance sheet disclosures
Balance Sheet Disclosures
  • Capital Adequacy Ratio.
  • Capital Adequacy Ratio - Tier I capital
  • Capital Adequacy Ratio - Tier II capital
  • Percentage of Shareholding of the Government of India in the nationalized banks.
slide10
Amount of Subordinated debt raised as Tier-II capital.
  • Gross value of investments, etc.
  • Provisions made towards depreciation in the value of Investments.
  • Movement of provisions held towards depreciation on investments.
  • Repo Transactions.
slide11
Non-SLR Investment Portfolio.
  • Forward Rate Agreement/ InterestRate Swap.
  • Exchange Traded Interest Rate Derivatives.
  • Disclosures on risk exposure in derivatives.
  • Percentage of Net NPAs to Net advances.
  • Movements in NPAs.
slide12
Amount of provisions made towards NPAs.
  • Movement of provisions held towards NPAs.
  • Details of Loan assets subjected to Restructuring.
  • Restructuring under CDR.
  • Details financial assets sold to an SC/RC for Asset Reconstruction.
  • Provision on Standard Asset.
slide13
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.
slide14
Profit per employee.
  • Maturity pattern of Loans and Advances.
  • Maturity pattern of Investment Securities.
  • Maturity Pattern of Deposits.
  • Maturity Pattern of Borrowings.
  • Foreign Currency Assets and Liabilities.
slide15
Exposure to Real Estate Sector.
  • Exposure to Capital Market - Investment in Equity Shares, etc.
  • Bank Financing for Margin Trading.
  • Exposure to Country Risk.
  • Details of Single Borrower/Group Borrower Limit exceeded by the bank.
slide16
Provisions made towards Income Tax during the year.
  • Disclosure of Penalties imposed by RBI.
  • Consolidated Financial Statements – AS 21
  • Segment Reporting – AS 17
  • Related Party Disclosure – AS 18
  • Other disclosures as required under the relevant Accounting Standards.
compliance of accounting standards
COMPLIANCE OF ACCOUNTING STANDARDS
  • Compliance of Accounting Standards (AS-1) relating to disclosure of accounting policies.
  • Accounting standards-5 relating to Profit & Loss account, prior period, changes in accounting etc.
  • AS-9 Revenue recognition.
slide18
AS-15 Retirement benefit.
  • AS-17 Segment Reporting.
  • AS-18 Related party disclosures.
  • AS-21 Consolidated financial statements.
slide19
AS-22 Accounting for taxes on income.
  • AS-23 Accounting for inventories in associates in consolidated Balance Sheet.
  • AS-24 Discounting operations.
  • AS-25 interim financial reporting.
frauds
Frauds

Reporting of frauds to RBI

- Frauds involving Rs. 1 lakh and above.

- Frauds committed by unscrupulous borrowers.

- Frauds involving Rs. 100 lakh and above.

- Cases of attempted fraud.

Refer Master Circular No. –:

DBS. .FrMC. BC. No.. 1 /23.04.001/2005-06, Dt. September 9, 2005

exposure norms
EXPOSURE NORMS

General

Norms setup by the board to be considered but not exceeding

  • 15% to single borrower based on capital funds of the bank.
  • 40% to the group of companies of the borrower group.
    • Exposure shall be recognized in terms of sanctioned limit or amount outstanding whichever is higher.
    • It will include funded and non funded exposure.

It will also include Credit exposure / investment exposure.

slide22
Other Important Circulars
  • One time settlement scheme.
  • Management of advances.
  • Debt restructuring.
  • Prudential Norms of classification of advances and provisioning requirements.
one time settlement
ONE TIME SETTLEMENT

The scheme will not cover cases of willful default, frauds and misfeasance.

(Refer – Master Circular Dt. 3rd September, 2005)

management of advances
MANAGEMENT OF ADVANCES

Principles relating to management of advances should be kept in mind.

For brief understanding refer master circular of RBI sent to Urban Co-operative banks should be referred which at least should be kept in mind for commercial banks also.

Refer Master circular-:

RBI/2005-06/112

UBD.BPD (PCB) MC. No. 5 /13.05.00/2005-06

Dt. August 11 , 2005.

slide25
System of credit appraisal.
  • Systems of sanctioning / disbursement.
  • Policy guidelines on advancing have been disbursed without complying terms & conditions.
  • Examination of the procedure laid down by bank for periodic review of advances including review / renewal and other procedural aspects.
slide26
System of obtaining report of stock audit periodically.
  • Systems of adherence of branch discretionary powers.
  • System of reporting to controlling office by branches – its adherence there to.
  • System of compliance of guidelines issued by controlling authority of the bank.
slide27
System in place in classification of advances.
  • Systems of recovery of NPA advances.
  • System of rephasement / reschedulement / restructuring of advances.
  • System of identification of diversion of funds.
slide28
System of analysis of B/Sheet, Q1SI, II & III.
  • Follow up mechanism in place.
  • System of identification of accounts, which has become doubtful of recovery.
  • System in place with respect to compromise / settlement and write off cases.
  • System in place for issuing guarantees and letter of credit.
debt restructuring
DEBT RESTRUCTURING

Debt restructuring guidelines as laid down by the RBI in terms of Master Circular-:

RBI/2005-06/159

DBOD. BP. BC. No. 34 / 21.04.132/ 2005-06  

Dt. September 8, 2005

prudential norms for classification of advances provisioning requirements
Prudential Norms for Classification of Advances & Provisioning Requirements

Refer master circular-:

RBI No. 2005-06/ 28

DBOD No. BP. BC. 11 / 21.04.048 / 2005-06

Dt. July 1, 2005.

Special Attention

  • Adhoc facility
relief measure in respect of natural clamities
RELIEF MEASURE IN RESPECT OF NATURAL CLAMITIES

Refer master circular-:

Dt. 7th January, 2005 & 29th July, 2005.

priority sector lending
PRIORITY SECTOR LENDING

The norms for priority sector has been laid down by the RBI in terms of master circular no. -:

RBI/2005-06/65 

RPCD. No.Plan. BC. 21/ 04.09.01/ 2005-06

Dt. July 18, 2005

The principle laid down should be kept in mind while doing audit.

capital adequacy
Capital Adequacy

General

  • With a view to adopting the Basle Committee framework on capital adequacy norms which takes into account the elements of risk in various types of assets in the balance sheet as well as off-balance sheet business and also to strengthen the capital base of banks, Reserve Bank of India decided in April 1992 to introduce a risk asset ratio system for banks (including foreign banks) in India as a capital adequacy measure.
slide34
Essentially, under the above system the balance sheet assets, non-funded items and other off-balance sheet exposures are assigned weights according to the prescribed risk weights and banks have to maintain unimpaired minimum capital funds equivalent to the prescribed ratio on the aggregate of the risk weighted assets and other exposures on an ongoing basis. The broad details of the capital adequacy framework are detailed below.
norm of capital adequacy
Norm of Capital Adequacy

Minimum requirement of capital funds

Banks are required to maintain a minimum CRAR of 9% on an ongoing basis.

Tier II elements should belimited to a maximum of 100% of total Tier I elements for the purpose of compliance with the norms.

The elements of Tier I & Tier II capital do not include foreign currency loans granted to Indian parties.

tier i capital
Tier I Capital
  • Elements of Tier I capital
    • Paid-up capital, statutory reserves, and other disclosed free reserves, if any.
    • Capital reserves representing surplus arising out of sale proceeds of assets.
  • Equity investments in subsidiaries, intangible assets and losses in the current period and those brought forward from previous periods, should be deducted from Tier I capital.
slide37

In the case of public sector banks which have introduced Voluntary Retirement Scheme (VRS), in view of the extra-ordinary nature of the event, the VRS related Deferred Revenue Expenditure would not be reduced from Tier I capital. However, it will attract 100% risk weight for capital adequacy purpose.

  • Creation of deferred tax asset (DTA) results in an increase in Tier I capital of a bank without any tangible asset being added to the banks’ balance sheet. Therefore, DTA, which is an intangible asset, should be deducted from Tier I capital.
tier ii capital
Tier II Capital

Elements of Tier II capital

  • Undisclosed reserves and cumulative perpetual preference shares.
  • Revaluation reserves.
  • General provisions and loss reserves.
  • Hybrid debt capital instruments.
  • Subordinated debt.
  • Investment Fluctuation Reserve (IFR).
method of calculation of capital adequacy
Method of Calculation of Capital Adequacy

Procedure

Based on assignment of risk weights on different assets class, computation be made on total risk weighted assets.

Risk weighted assets are comprised of credit risk assets and general market risk assets.

slide40
Calculation of total risk-weighted assets and capital ratio-:
  • Arrive at the risk weighted assets for credit risk in the banking book and for counterparty credit risk on all OTC derivatives.
  • Convert the capital charge for market risk to notional risk weighted assets by multiplying the capital charge arrived at as above in Performa-1 by 100 ÷ 9 [the present requirement of CRAR is 9% and hence notional risk weighted assets are arrived at by multiplying the capital charge by (100 ÷ 9)]
  • Add the risk-weighted assets for credit risk as at (a) above and notional risk-weighted assets of trading book as at (b) above to arrive at total risk weighted assets for the bank.

Compute capital ratio on the basis of regulatory capital maintained and risk-weighted assets.

illustration
ILLUSTRATION
  • Capital funds
    • Tier I capital 55
    • Tier II capital 50

Total Capital Funds 105

  • Total risk weighted assets 1140
    • RWA for credit risk 1000
    • RWA for market risk 140
  • Total CRAR 9.21
  • Minimum capital required to

support credit risk (1000*9%) 90

    • Tier I - 45 (@ 4.5% of 1000) 45
    • Tier II - 45 (@ 4.5% of 1000) 45
  • Capital available to support
  • market risk (105 - 90) 15
    • Tier I - (55 - 45) 10
    • Tier II - (50 - 45) 5
market risk assets
Market Risk Assets
  • Trading book assets, which includes investments held for trading and available for sale.
  • Off Balance Sheet items.
  • Derivative transactions.
  • Interest rates swap.
slide44
Gold open positions.
  • Long position in interest rate future.
  • Forex open positions.
  • Contingent credits.