1. Audit of Agricultural and other priority sector advances
Statutory audit of bank branches
Friday, 24th March 2017
Pune Branch of WIRC of The Institute of Chartered accountants of India
Audit of Agricultural and other priority sector advances
CA. Dr. Dilip V Satbhai
B.Com (Hons), LL.M.(First rank), Ph. D.(Law), F.C.A. DISA(icai), DIRM(icai)
Senior Partner – Laws, Taxation & Assurance :
M/s. D. V. Satbhai & Co., Chartered Accountants, Pune
Convener: Pune GST Study group of ICAI, New Delhi
Former Chairman of Pune Branch of WIRC and Past co-opted committee member of WIRC and Central council of
The Institute of Chartered Accountants of India, New Delhi

2. Statutory audit of bank branches
Why priority sector ?
Focus on rural development by the government
Channel resources to areas that are deemed national priorities
Inclusion of poor in the economic growth of the country
Synchronize the bank lending account to national importance

3. Statutory audit of bank branches
Objective
Objective of priority sector lending program is to ensure adequate fund flows to some of the vulnerable sectors of the economy, which may not be attractive for the banks from the point of view of profitability.

4. Statutory audit of bank branches
Priority Sector includes the following categories:
(i) Agriculture (ii) Micro, Small and Medium Enterprises (iii) Export Credit (iv) Education (v) Housing (vi) Social Infrastructure (vii) Renewable Energy (viii) Others

5. Statutory audit of bank branches
Total Priority Sector
40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
Foreign banks with 20 branches and above have to achieve the Total Priority Sector Target within a maximum period of five years starting from April 1, 2013 and ending on March 31, 2018 as per the action plans submitted by them and approved by RBI.

6. Statutory audit of bank branches
Categories
Domestic commercial banks / Foreign banks with 20 and above branches
(As on )
Foreign banks with less than 20 branches
Total Priority Sector
40%
32%
Total Agriculture
18%
No specific target.
Total Micro Enterprises
7% (March 2016)
Advances to Weaker Sections
10%
The percentage of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.

7. Statutory audit of bank branches
Agriculture
18 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
Within the 18 percent target for agriculture, a target of 8 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher is prescribed for Small and Marginal Farmers, to be achieved in a phased manner i.e., 7 per cent by March 2016 and 8 per cent by March 2017.

8. Statutory audit of bank branches
Categories under ‘Agriculture’?
The activities covered under Agriculture are classified under three sub-categories
viz.
1.Farm credit,
2. Agriculture infrastructure and
3. Ancillary activities

9. Statutory audit of bank branches
Farm Credit
(i) Crop loans to farmers, which will include traditional/non-traditional plantations and horticulture, and, loans for allied activities.
(ii) Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation etc.)
(iii)Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, transporting their own farm produce.

10. Statutory audit of bank branches
(iv) Loans to farmers up to ₹50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for max 1 Year.
(v) Loans to distressed farmers indebted to non-institutional lenders.
(vi) Loans to farmers under the Kisan Credit Card Scheme.
(vii)Loans to small and marginal farmers for purchase of land for agricultural purposes.

11. Statutory audit of bank branches
Agriculture infrastructure
Loans for construction of storage facilities (warehouses, market yards, godowns ) including cold storage units/ cold storage chains designed to store agriculture produce/products, irrespective of their location.
Soil conservation and watershed development.
Plant tissue culture and agri-biotechnology, seed production, production of bio-pesticides, bio-fertilizer, and vermi composting.
For the above loans, an aggregate sanctioned limit of ₹100 crore per borrower from the banking system, will apply.

12. Statutory audit of bank branches
Ancillary Activities
Loans up to ₹5 crore to co-operative societies of farmers for disposing of the produce of members.
Loans for setting up of Agriclinics and Agribusiness Centres.
Loans for Food and Agro-processing up to an aggregate sanctioned limit of ₹100 crore per borrower from the banking system.
Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi- Purpose Societies (LAMPS) for on-lending to agriculture.
Loans sanctioned by banks to MFIs for on-lending to agriculture sector as per the conditions specified in paragraph IX of this circular
Outstanding deposits under RIDF and other eligible funds with NABARD on account of priority sector shortfall.

13. Statutory audit of bank branches
Non Performing Assets
Short duration crops: Loan outstanding for more than two crop seasons
Long duration crops: Loan outstanding for more than one crop season
Restructuring of loans
In case of Natural calamities, the banks may decide their own relief measures like conversion of short term facility into a term loan or re-schedulement of repayment period. In all these cases, the account is not treated as NPA.

14. Statutory audit of bank branches
Government guaranteed advances
The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked.

15. Statutory audit of bank branches
Verification:
a) Visits
b) verification of history of borrower and guarantors
c) How to read 7/12 extract and 8A extract
d) Inspection reports
e) Compliance of terms and sanction
d) Operation of account with special reference to payments and receipts

16. Statutory audit of bank branches
‘Out of Order’ status
An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'.
‘Overdue’
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.

17. Statutory audit of bank branches
Demonitization effect:
Due to withdrawal of the legal tender status of ₹ 500 and ₹ 1,000 notes (SBN) small borrowers may need some more time to repay their loan dues. It has been decided to provide an additional 60 days beyond what is applicable for the concerned regulated entity(RE) for recognition of a loan account as substandard in the following cases:
Running working capital accounts (OD/CC)/crop loans, with any bank, the sanctioned limit whereof is ₹ 1 crore or less;
Term loans, whether business or personal, secured or otherwise, the original sanctioned amount whereof is ₹ 1 crore or less, on the books of any bank or any NBFC, including NBFC (MFI). This shall include housing loans and agriculture loans.
Loans sanctioned by banks to NBFC (MFI), NBFCs, Housing Finance Companies, and PACs and by State Cooperative Banks to DCCBs.
The above guidelines will also be applicable to loans extended by DCCBs.

18. Statutory audit of bank branches
2. The above dispensation will be subject to following conditions:
It applies to dues payable between November 1, 2016 and December 31, This is a short-term deferment of classification as substandard due to delay in payment of dues arising during the period specified above and does not result in restructuring of the loans.
Dues payable before November 1 and after December 31, 2016, will be covered by the extant instruction for the respective regulated entity with regard to recognition of NPAs.
The additional time given shall only apply to defer the classification of an existing standard asset as substandard and not for delaying the migration of an account across sub-categories of NPA.

19. Statutory audit of bank branches
Limits prescribed for bank loans to Micro, Small and Medium Enterprises engaged in the manufacture or production of goods:
The manufacturing enterprises are defined in terms of investment in plant and machinery under MSME Act, 2006.
Bank loans up to Rs. 5 crore per unit to Micro and Small Enterprises and Rs. 10 crore to Medium Enterprises engaged in providing or rendering of services and defined in terms of investment in equipment under MSME Act, 2006 are eligible for classification under priority sector.

20. Statutory audit of bank branches
Micro Enterprises
7.5% percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher to be achieved in a phased manner i.e. 7 per cent by March and 7.5 per cent by March 2017.
The sub-target for Micro Enterprises for foreign banks with 20 branches and above would be made applicable post 2018 after a review in 2017.

21. Statutory audit of bank branches
MSEs include
Manufacturing Enterprises:
Micro enterprises – Investment in plant & machinery does not exceed Rs 25 lakh irrespective of the location
Small enterprises – Investment more than Rs.25 lakh but does not exceed Rs 5 crore
Service Enterprises:
Micro enterprises - Investment in equipment not exceeding Rs 10 lakh
Small (service) enterprises - Investment in equipment is more than Rs.10 lakh but does not exceed Rs 2 crore.

22. Statutory audit of bank branches
Bank loans to micro and small enterprises (both manufacturing and service) are eligible to be classified under PS (Priority sector).
The small and micro (service) enterprises include
small road & water transport operators
small business
professional & self-employed persons
Retail trade
Consultancy services

23. Statutory audit of bank branches
Manufacturing Enterprises: MSEs engaged in the manufacture/production of goods to any industry specified in the 1st Schedule to Industries (Development & Regulation) Act, and now under MSE Act 2006
- Loans for food and agro processing
Service Enterprises:
- Bank loans to MSE engaged in providing or rendering of services
Export credit to MSE units: for exporting of goods/services
Khadi and Village Industries Sectors: all loans sanctioned to units in the KVI sector irrespective of size of operations, location and amount of original investment in P&M

24. Statutory audit of bank branches
Loans to persons involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries
Loans to cooperatives of producers in the decentralized sector viz., artisans, village and cottage industries
Loans sanctioned by banks to MFIs for on-lending to MSE sector as per conditions specified earlier

25. Statutory audit of bank branches
Housing
Loans to Individuals for ‘purchase/ construction’
Rs. 28 lakhs in Metropolitan centres
Rs. 20 lakhs in others
2. Loans for ‘repairs’
Rs. 5 lakhs in Metropolitan centres
Rs. 2 lakhs in others
3. Loans to ‘any governmental agency’ Slum clearance/ rehabilitation of slum dwellers (Rs. 10 lakhs)
4. Housing projects exclusively for economically weaker and low income groups (Cost per dwelling unit Max. Rs. 10 lakhs)
Loans to Housing Finance Companies for on lending for the purpose of purchase/ reconstruction/ slum rehabilitation etc. (Max Rs. 10 lakhs)
Outstanding deposit with NHB on account of priority sector shortfall.

26. Statutory audit of bank branches
Bank loans to HFCs, approved by NHB for their refinance, for on lending for the purpose of purchase/construction/reconstruction of individual dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling as may be specified by RBI per dwelling unit. The all inclusive interest rate charged to the ultimate borrower should not exceed the lowest lending rate of the lending bank for HLs + 2% per annum

27. Statutory audit of bank branches
Export credit
Extended by foreign banks with less than 20 branches will be reckoned for priority sector target achievement
As regards domestic banks and foreign banks (with 20 and above branches), export credit is not a separate category under priority sector
Export credit towards categories of priority sector i.e. agriculture and MSE sector will however be accounted

28. Statutory audit of bank branches
Weaker section
Small (landholding more than 1 hectare but less than 2 hectares) and Marginal farmers (landholding upto 1 hectare)
Artisans, village and cottage industries where credit limits do not exceed Rs.50,000 or any other sum notified.
Scheduled Castes and Scheduled Tribes
Beneficiaries of DRI Scheme

29. Statutory audit of bank branches
Education
These are the loans given to ‘Individuals’ for educational purpose including vocational courses upto Rs. 10 lakhs (irrespective of sanction amount).
Important to note that the definition of abroad/ in India is not defined.
Disbursement of education loan
Repayment

30. Statutory audit of bank branches
Miscellaneous:
Loans to ‘Individuals’ and Self-Help Groups (SHG)/ Joint Liability Groups (JLG) Max amount Rs. 50,000/- per borrower
Loans to distressed persons [other than farmers- Max amount Rs. 1,00,000 per borrower to prepay their debt to non-institutional lenders.
Overdrafts, Max Rs. 5,000 (per account), granted against Pradhan Mantri Jan-DhanYojana (PMJDY)
Loans sanctioned to State Sponsored Organisations for Scheduled Castes/ Scheduled Tribes for the specific purpose of purchase and supply of inputs to and/or the marketing of the outputs of the beneficiaries of these organisations.

31. Statutory audit of bank branches
Social Infrastructure and Renewable Energy
Bank loans up to a limit of ₹ 5 crore per borrower for building social infrastructure for activities namely schools, health care facilities, drinking water facilities and sanitation facilities.
Bank loans up to a limit of ₹ 15 crore to borrowers for purposes like solar based power generators, biomass based power generators, wind mills, micro- hydel plants and for non-conventional energy based public utilities viz. street lighting systems, and remote village electrification.
For individual households, the loan limit for renewable energy projects will be ₹ 10 lakh per borrower.