1. Presentation on Bank Audit
CA Manoj P. Gupta

2. Types of Advances in Banks
FUNDED
NON-FUNDED
Guarantees
Letter of Credit
Letter of comfort
Cash Credit
Term Loans ( Home Loans
Vehicle Loans, Mortgage
Loans, etc)
Overdraft
Bills Purchased/ Discounted
Packing Credit
Foreign Currency loans

3. Nature of Securities Primary and Collateral Securities
Mode of Creation of Security
Mortgage – Equitable & Registered
Pledge
Hypothecation
Assignment

4. Substandard Doubtful Loss What is an NPA ?
An asset when it ceases to generate income for the bank is categorised as NPA.
Categories of NPA :
Substandard
Doubtful
Loss

5. IRAC Norms Standard Sub standard Doubtful
The advances of the bank are classified into 4 categories :
Standard
Sub standard
Doubtful
Loss

6. Substandard Assets
A substandard asset would be one, which has remained NPA for a period less than or equal to 12 months.
Doubtful Assets
An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.

7. Loss Assets
A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.
Accounts where there is erosion in the value of security/frauds committed by borrowers and there are potential threats for recovery In such cases the asset should be straightaway classified as doubtful or loss asset.

8. Non performing Assets
Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,
The account remains ‘out of order’, in respect of an Overdraft/Cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,
The instalment of principal or interest thereon remains overdue for one crop season for long duration crops,

9. The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction
In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days
Stock statements relied upon by the banks for determining drawing power should not be older than three months. A working capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days.
Where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA.
Accounts regularised near about the balance sheet date should be handled with care. Where the account indicates inherent weakness the account should be classified as a NPA.

10. Other Key Issues
Asset Classification to be borrower-wise and not facility-wise
If an account is classified as NPA then all the facilities granted by the bank to a borrower is required to be treated as NPA.
Exception : In respect of advances granted by banks to PACS/ FSS under the on-lending system, only that particular credit facility granted to PACS/ FSS which is in default will be classified as NPA and not all the credit facilities sanctioned.

11. Advances against Term Deposits, NSCs, KVPs/IVPs, etc.
Advances against term deposits, NSCs, IVPs, KVPs and life policies need not be treated as NPAs, provided adequate margin is available in the accounts.
Exception : Advances against gold ornaments, government securities and all other securities are not covered by this exemption.

12. Appropriation of recovery in NPAs
Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.
In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.

13. Interest Application
On an account turning NPA, banks should reverse the interest already charged and not collected by debiting Profit and Loss account, and stop further application of interest.
However, banks may continue to record such accrued interest in a Memorandum account in their books.

14. Income Recognition
Income on standard accounts is recognised on accrual basis.
Income from non-performing assets (NPA) is recognised on realisation basis. This applies to Government guaranteed accounts also.

15. Reversal of income
If any advance slips to NPA category, the entire interest credited to income account in the past periods, should be reversed.
Fees, commission and similar income are also required to be reversed if uncollected.

16. Category of Standard Asset
Norms for Provisioning on Loans & Advances
Provision on Standard Assets
Category of Standard Asset
Rate of Provisioning
Tier II
Tier I
Direct advances to Agriculture and SME sectors
0.25 %
0.25%
Commercial Real Estate (CRE) sector
1.00 %
Commercial Real Estate-Residential Housing Sector (CRE-RH)
0.75%
All other loans and advances not included in (a) and (b) above
0.40%

17. Sub-standard Assets
Secured portion : 15 %
Unsecured Portion : Additional provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balance.
Doubtful Asset
Secured Portion
Period for which the advance has remained in 'doubtful' category
Provision Requirement
Up to one year
25 per cent
One to three years
40 per cent
Over three years
100 percent

18. Doubtful Assets
For unsecured portion : 100 %
Loss Assets
100% ( After considering salvage value )

19. Other Points Provisioning norms in respect of all cases of fraud:
The entire amount due to the bank , irrespective of the quantum of security held against such assets, is to be provided for over a period not exceeding four quarters commencing with the quarter in which the fraud has been detected;

20. Advance covered by CGTMSE
In case the advance covered by CGTMSE becomes non-performing, no provision need be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion should be provided for.

21. Example for CGTMSE cover :
Balance outstanding
Rs lakh
Less: Value of security
Rs lakh
Unsecured amount
Rs lakh
Less: CGTMSE/CRGFTLIH cover (75%)
Rs lakh
Net unsecured and uncovered portion:
Rs lakh
Provision for Secured 40% of Rs.1.50 lakh
Rs.0.60 lakh
Provision for Unsecured & uncovered 100% of Rs.2.12 lakh
Rs.2.12 lakh
Total provision required
Rs.2.72 lakh

22. Valuation of Security for provisioning purposes
In cases of NPAs with balance of Rs. 5 crore and above stock audit on annual basis is required to be done to ascertain the value of the security.
Immovable properties charged in favour of the bank is required to be valued once in three years.

23. Provisioning for housing loans at teaser rates
The standard asset provisioning on the outstanding amount of such loans has been increased from % to 2.00 %.
The provisioning on these assets would revert to per cent after 1 year from the date on which the rates are reset at higher rates if the accounts remain ‘standard’.

24. Issues under Agriculture Loans

25. Asset classification in case of agriculture loan
A loan granted for short duration crops (eg. Wheat, rice etc. ) will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons.
A loan granted for long duration crops (eg. Sugarcane, banana, onions, etc. ) will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season.

26. Where natural calamities impair the repaying capacity of agricultural borrowers, banks may decide on their own as a relief measure conversion of the short-term production loan into a term loan or re-schedulement of the repayment period;
In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA. The asset classification of these loans would thereafter be governed by the revised terms & conditions and would be treated as NPA if interest and/or instalment of principal remains overdue for two crop seasons for short duration crops and for one crop season for long duration crops.

27. Jai Kisan Fasal Rin Mafi Yojana
Maximum Rs. 2 lacs can be waived.
Land should be in MP.
Restructured loans also allowed.
NPA accounts before 01/04/2007 not eligible.
Accounts to be settled on priority basis( upto 31/03/2019) :
Performing assets upto Rs
Non Performing assets upto Rs. 2 lacs
One time Settlement – (upto 2 lacs)
Standard : (100 % by state govt.)
Sub Standard : ( 75 % by state govt. , 25% by bank )
Doubtful assets : ( 50 % by state govt. , 50% by bank )

28. OTS amount shall be decided on the minimum of outstanding loan amount as on 31st March, 2018 or as on the date of the account becoming NPA.
Farmer is required to contribute his contribution by 30th June 2019.
Any transaction done after 31st March, 2018 shall not be taken into consideration for calculating outstanding amount.
Cases of fraud are not eligible under this scheme.
Farmers will be eligible for fresh production loans after this scheme.
(The auditors will face challenge in respect of the loan waiver scheme in relation to asset classification, provisioning, and income recognition)

29. Asset Category- Sub-standard
Example
Asset Category- Sub-standard
Sr no
Particulars
Amount A
Overdue amount on the date of account becoming NPA
300000 B
Overdue amount as on 31st March, 2018 C
Amount deposited by farmer after 31st March 2018
50000 D
OTS Outstanding Loan Amount= Minimum amount
outstanding on the date of account becoming NPA or
31st March, 2018 E
Share of overdue loan for OTS by GoMP and Farmer
225000 F
Share of overdue loan for OTS by the Bank ( )
75000 G
GoMP share payable to bank ( 75 % of )
150000 H
Farmer's share payable to bank ( – of MP Govt.) I
Farmer's share already paid (as per "c" above) j
Farmer's share to be paid to Bank (j=h-i)
25000

30. Example Asset Category- Doubtful or Loss or Written off
Sr No
Particulars
Amount A
Overdue amount on the date of account becoming NPA
400000 B
Overdue amount as on 31st March, 2018 C
Amount deposited by farmer after 31st March 2018
50000 D
OTS Outstanding Loan Amount= Minimum amount
outstanding on the date of account becoming NPA or
31st March, 2018 E
Share of overdue loan for OTS by GoMP and Farmer
200000 F
Share of overdue loan for OTS by the Bank ( ) G
GoMP share payable to bank ( 50% of )
100000 H
Farmer's share payable to bank ( of MP Govt ) I
Farmer's share already paid (as per "c" above) j
Farmer's share to be paid to Bank (j=h-i)

31. PRUDENTIAL NORMS ON RESTRUCTURING OF ADVANCES

32. RESTRUCTURING
Restructuring normally involves modification of terms of the advances, which would generally include, among others, alteration of repayment period/repayable amount/ the amount of instalments/rate of interest. Thus, any change in repayment schedule of a loan will render it as restructured account.

33. ELIGIBILITY CRITERIA FOR RESTRUCTURING OF ADVANCES
Banks may restructure the accounts classified under 'standard', 'sub- standard' and 'doubtful' categories.
Banks cannot reschedule accounts with retrospective effect.
No restructuring unless the financial viability is established.

34. ASSETS CLASSIFICATION NORMS
Assets shall degrade upon restructuring. Standard Assets should be immediately reclassified as Sub-Standard and NPA would slip further into a lower asset classification category.
Standard Assets classified as NPA and NPA accounts retained in the same category on restructuring should be upgraded only when all outstanding loans are served satisfactorily during ‘Specified Period’*
(* a period of one year from the commencement of first payment of Interest or Principal, whichever is later).
Any additional finance may be treated as 'standard asset'

35. INCOME RECOGNITION NORMS
Interest income in respect of restructured accounts classified as 'standard assets' will be recognized on accrual basis and that in respect of the accounts classified as 'non-performing assets' will be recognized on cash basis.
PROVISIONING NORMS
Restructured accounts classified as standard advances will attract a higher provision.
Restructured accounts classified as non-performing assets, when upgraded to standard category will attract a higher provision in the first year from the date of upgradation.

36. Prudential Norms for Conversion of Unpaid Interest into 'Funded Interest Term Loan'
Asset Classification Norms :- The FITL created by conversion of unpaid interest will be classified in the same asset classification category in which the restructured advance has been classified. Further movement in the asset classification of FITL would also be determined based on the subsequent asset classification of the restructured advance.

37. Project Under Implementation

38. RBI Guidelines Delay in projects for legal reasons
delays in Government approvals
change in govt. policies
This may require restructuring.
Deferment of DCCO
Infrastructure Projects : will not be treated as restructuring if revised DCCO falls within a period of 2 years.
Non Infrastructure Projects : will not be treated as restructuring if revised DCCO falls within a period of 1 year.
Such project loans will be treated as standard assets in all respects.

39. Extension beyond the time period allowed
Banks may restructure project loans, by way of revision of DCCO beyond the time limits in the previous point and retain the ‘standard’ asset classification, if the fresh DCCO is fixed within the following limits, and the account continues to be serviced as per the restructured terms:
Infrastructure Projects involving court cases
Up to another two years (beyond the two year period quoted at paragraph 2 above, i.e., total extension of four years), in case the reason for extension of DCCO is arbitration proceedings or a court case.

40. Infrastructure Projects delayed for other reasons beyond the control of promoters
Up to another one year (beyond the two year period quoted at paragraph 2 above, i.e., total extension of three years), in case the reason for extension of DCCO is beyond the control of promoters (other than court cases).
Project Loans for Non-Infrastructure Sector (Other than Commercial Real Estate Exposures)
Up to another one year (beyond the one year period quoted at paragraph 2 above, i.e., total extension of two years).

41. Banks, if deemed fit, may extend DCCO beyond the respective time limits stipulated at previous topic; however, in that case, banks will not be able to retain the ‘standard’ asset classification status of such loan accounts.
Any change in the repayment schedule of a project loan caused due to an increase in the project outlay on account of increase in scope and size of the project, would not be treated as restructuring if:
The increase in scope and size of the project takes place before commencement of commercial operations of the existing project.

42. The rise in cost excluding any cost-overrun in respect of the original project is 25% or more of the original outlay.
The bank re-assesses the viability of the project before approving the enhancement of scope and fixing a fresh DCCO.
On re-rating, the new rating is not below the previous rating by more than one notch.

43. Change in Ownership
If a change in ownership takes place any time before the original DCCO, banks may permit extension of the DCCO of the project up to two years in addition to the periods quoted at points above, without any change in asset classification of the account subject to the conditions stipulated in the following paragraphs:
Implementation of the project is affected primarily due to inadequacies of the current promoters
The project in consideration should be taken- over/acquired by a new promoter/promoter group with sufficient expertise in the field of operation.

44. The new promoters should own at least 51 per cent of the paid up equity capital.
Viability of the project is established.
The new owners will bring in additional monies required.
The repayment schedule should not extend beyond 85 per cent of the economic life of the project
This facility would be available to a project only once.

45. MSME Advances

46. Definition of Micro, Small and Medium Enterprises
Manufacturing Enterprises i.e. Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:
Investment in Plant & Machinery
Micro Enterprise
Upto Rs 25 lakh
Small Enterprise
From Rs 25 lakh to Rs 5 crore
Medium Enterprise
From Rs 5 crore to Rs 10 crore

47. Definition of Micro, Small and Medium Enterprises
Service Enterprises i.e. Enterprises engaged in providing or rendering of services and whose investment in equipment is as specified below:
Investment in Equipment
Micro Enterprise
Upto Rs 10 lakh
Small Enterprise
From Rs 10 lakh to Rs 2 crore
Medium Enterprise
From Rs 2 crore to Rs 5 crore

48. MSMED Act, 2006 does not provide for clubbing of investments of different enterprises set up by same person / company for the purpose of classification as Micro, Small and Medium enterprises,

49. RBI has decided to permit a one-time restructuring of existing loans to MSMEs:
That are in default but ‘standard’ as on January 1, 2019
Having valid Udyog Aadhar Number [UAN]
Having valid GSTN Number
The aggregate exposure, should not exceed Rs 25 crores as on January 1, 2019.
The restructuring has to be implemented by March 31,
A provision of 5% in addition to the provisions already held, shall be made in respect of accounts restructured under this scheme.

50. Interest Subvention Scheme for MSMEs 2018
Prime Minister has announced 2% interest subvention for all GST registered MSMEs, on fresh or incremental loans.
Eligibility for Coverage
All MSMEs who meet the following criteria shall be eligible
a. Valid Udyog Aadhar Number [UAN]
b. Valid GSTN Number
c. The interest relief will be calculated at two percentage points per annum (2% p.a.), on the incremental or fresh amount of working capital sanctioned or incremental or new term loan disbursed by eligible institutions.
d. The loan accounts on the date of filing claim should not have been declared as NPA as per extant guidelines in force. No interest subvention shall be admissible for any period during which the account remains NPA.

51. Asset Classification for MSME’s
A period of 180 days will be reckoned for determining the classification of standard assets to sub standard assets rather than 90 days, subject to the following conditions :
The aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower does not exceed Rs 25 crore as on May 31, 2018.
The borrower’s account was standard as on August 31,
Valid Udyog Aadhar Number [UAN]
The payments due from the borrower as on September 1, and falling due thereafter up to December 31, were/are paid not later than 180 days from their original due date.