1. CA. Shashi Gupta, FCA1 B ANK A UDIT A D V A N C E S Presented by: Presented by:

2. CA. Shashi Gupta, FCA2 ADVANCES Restricted Categories of Advances Minimum Information From Branch Requirements of LFAR Verification Classification Income Recognition Provisioning

3. CA. Shashi Gupta, FCA3 Restrictions

4. CA. Shashi Gupta, FCA4 Restriction on Advances Advances against own shares Advances to Banks Directors and firms/companies in which they have substantial interest To Relatives of Directors without approval of RBI Loans to Companies to buy back their own shares To Industries producing/consuming Ozone Depleting Substances Restrictions on loans against Shares, Debentures, Bonds and Money Market Mutual Funds To agents/Intermediaries based on consideration of Deposit Mobilization

5. CA. Shashi Gupta, FCA5 Restriction on Advances Against Certificate of Deposits To NBFC except relating to financing of Commercial Vehicles, 2/3 wheelers To Equipment Leasing Companies To Factoring Companies For Purchase/Lease of Existing Assets Against FDR’s of Other Banks Against Bullion/primary gold Acquisition of KVP

6. CA. Shashi Gupta, FCA6 Restriction on Advances Housing Project - No advance to/for: –Private Builder for acquisition of land –Buildings meant for offices of Govt/Semi-Govt –Non-corporate PSU’s –Properties falling under unauthorized colonies –Properties meant for residential use but intended commercial use

7. CA. Shashi Gupta, FCA7 MINIMUM INFORMATION

8. CA. Shashi Gupta, FCA8 MINIMUM INFORMATION Advances giving details of both funded as well as non- funded limits Advances sanctioned during the year All large advances: Generally advances of Rs. 2 crores or 5% of aggregate advance of branch, whichever is lower Advances rescheduled/restructured during the year List of NPAs Accounts covered under ECGC/Central Govt. Guarantee Frauds reported during the year Accounts where stock statements are not received for more than 6 months

9. CA. Shashi Gupta, FCA9 MINIMUM INFORMATION Accounts which have not been renewed for more than 6 months Accounts which were overdrawn during the year for more than 90 days Accounts where the internal/external rating was downgraded during the year Accounts upgraded from NPA during the year Accounts where LCs/BGs devolved/invoked during the year Accounts where ad-hoc/stand-by line of credit was granted during the year NPA accounts where valuation report is older than 3 years

10. CA. Shashi Gupta, FCA10 MINIMUM INFORMATION Accounts where limitation have expired Accounts where limitation is likely to expire in 6 months Advances where Insurance expired / under insurance / all risks not covered. Non Corporate accounts with limits above Rs 10.00 lacs where audited statements not received Advances with limits Rs 5.00 cr and above where Stock Audit not done.

11. CA. Shashi Gupta, FCA11 Exceptional Reports

12. CA. Shashi Gupta, FCA12 Exceptional Reports –Debit/Credit balance change –Maturity record deleted –Inactive accounts reactivated –Excess allowed over limit –Debits to income head accounts –Overdue bills and bills returned –Withdrawal against clearings –Deposit accounts with debit balances –Temporary OD beyond sanction limit –Standing Instructions failed in day –Changes in Master Data relating to Advances

13. CA. Shashi Gupta, FCA13 Drawing Power

14. CA. Shashi Gupta, FCA14 Requirements of LFAR

15. CA. Shashi Gupta, FCA15 Credit Appraisal Loan Application Preparation of Proposal: Latest Financial Statements Net worth of Borrower and Guarantor CIBIL – Borrower / Guarantor Past Dealings Repayment Capacity Functioning of Unit Compliance of terms of sanction Comparisons of Audited Data & Projections Adequate Appraisal Documentation

16. CA. Shashi Gupta, FCA16 Sanctioning Facility sanctioned as per delegated financial power, otherwise report on: Operations allowed over limits Temporary Overdraft Withdrawal against clearing Cheque/bills purchased Any other credit facility allowed

17. CA. Shashi Gupta, FCA17 Disbursement Compliance of terms of sanction Obtaining legal opinion and creating EM Obtaining personal guarantee

18. CA. Shashi Gupta, FCA18 Documentation Documents as per Bank Loan Manual/Circulars Execution of all documents before release Other deficiencies Non-registration of charges Non-obtaining of guarantees Marking of lien for advances against deposits/LIC/NSC/KVP Discharge of FDR’s and signature verification

19. CA. Shashi Gupta, FCA19 Review/Monitoring/Supervision Internal/Concurrent/RBI Audit reports Latest Balance Sheets and key data Periodic review Periodic balance confirmation/ acknowledgement of debts Status of review/renewal pending: Between 6 months and 1 year, & Over 1 year

20. CA. Shashi Gupta, FCA20 Review/Monitoring/Supervision  Periodic stock/book debt statements  other operational data/QIS  financial statements  Periodical stock audit  Audited accounts from non-corporate entities with limits beyond Rs. 10 lakhs  Inspection/physical verification of securities  frequent/unauthorized overdrawing beyond limits  inadequate insurance coverage

21. CA. Shashi Gupta, FCA21 Review/Monitoring/Supervision – CC/OD account remains continuously overdrawn; number of cheques issued are bounced due to insufficient funds; cheques deposited are not honoured and returned unpaid; the account has been granted continuous TOL by the branch–for 20 to 25 days every month; moreover, at times, such TOLs have been granted by the Branch Manager without having the power to do so; 12 month’s turnover in the account does not commensurate with the sale and purchase shown in 12 monthly stock Statements

22. CA. Shashi Gupta, FCA22 Review/Monitoring/Supervision – CC/OD - the realisation of bills purchased/bills discounted is not received on the due date and subsequently the same is cleared by debit to the borrower’s CC/OD a/c; - as soon as the above bills are cleared, fresh bills are purchased/discounted; - the facility has not been renewed on the due date and the reason given is that the borrower has not submitted the necessary papers;

23. CA. Shashi Gupta, FCA23 Review/Monitoring/Supervision – CC/OD - all overdue CC limits, OD limits, unrealised bills, unrealised interest are bundled together and the borrower is granted WCTL (Working Capital Term Loan) to avoid the account becoming NPA. Generally, such bullet loan is an indicator that the account is having problems; - for certain accounts, when papers are asked for, the branch is unduly slow in producing the same or makes a plea that the same have been sent to some authority and hence is unavailable at the branch or states that the same are not traceable; - in case of certain accounts, the Branch Manager pleads not to put any adverse remark in the report and that he shall get it rectified after the audit is over.

24. CA. Shashi Gupta, FCA24 Monitoring Large withdrawal of cash (MC:22.01.07, 4.6.1) Withdrawal strictly for the purpose of limit sanctioned( MC 22.01.07,4.6.2) Cheque against which withdrawals are allowed should represent genuine trade transactions and strict vigilance should be observed against assisting kite-flying operations (MC 22.01.07;4.6.2.v)

25. CA. Shashi Gupta, FCA25 Monitoring o No withdrawals against cheque of allied /sister concerns o withdrawal against clearing should be of temporary nature and after proper scrutiny and appraisal o Bills of accommodation nature should never be purchased o In case of diversion of funds for purposes, other than for which it was granted, banks must recall the amounts so diverted. In addition, banks may charge penal interest on the amount diverted.

26. CA. Shashi Gupta, FCA26 A DVANCES - LFAR  In respect of leasing finance activities compliances relating to security creation, asset inspection, insurance, and accounting norms etc.

27. CA. Shashi Gupta, FCA27 A DVANCES - LFAR  Are credit card dues recovered promptly?

28. CA. Shashi Gupta, FCA28 A DVANCES - LFAR  Has the branch identified and classified advances into standard/sub- standard/doubtful/loss assets in line with the norms prescribed by the Reserve Bank of India ?

29. CA. Shashi Gupta, FCA29 A DVANCES - LFAR  Cases where the auditor disagrees with the branch classification of advances into standard/sub- standard/doubtful/loss assets, with reasons.  indicate whether suitable changes have been incorporated / suggested in the Memorandum of Changes.

30. CA. Shashi Gupta, FCA30 A DVANCES - LFAR  cases where Controlling Authorities has authorized legal action for recovery of advances or recalling of advances but no such action was taken by the branch?

31. CA. Shashi Gupta, FCA31 A DVANCES - LFAR  Whether all non-performing advances been promptly reported?  whether any rehabilitation programme in respect of such advances has been undertaken, and if so, the status of such programme.

32. CA. Shashi Gupta, FCA32 A DVANCES - LFAR  claims for DICGC and Export Credit Guarantee/Insurance and subsidies, if any, been duly lodged and settled  status of pending claims in the format.

33. CA. Shashi Gupta, FCA33 A DVANCES - LFAR  In respect of non-performing assets, has the branch obtained valuation reports from approved valuers for the fixed assets charged to the bank, once in 3 years, unless the circumstances warrant a shorter duration?”

34. CA. Shashi Gupta, FCA34 A DVANCES - LFAR  Compliance of Recovery Policy with respect to compromise / settlement and write-off cases  Details of the cases of compromise / settlement and write-off cases involving writes-offs/waivers in excess of Rs.50 lakhs.

35. CA. Shashi Gupta, FCA35 A DVANCES - LFAR Guarantees and Letters of Credit :- Details of outstanding amounts of guarantees invoked and funded by the Branch at the end of the year in the prescribed format:-  Guarantee invoked, paid but not adjusted  Guarantee invoked, but not paid

36. CA. Shashi Gupta, FCA36 A DVANCES - LFAR Guarantees and Letters of Credit :- D etails of outstanding amounts of Letter of Credit and Co-Acceptances funded in the prescribed format

37. CA. Shashi Gupta, FCA37 Classification

38. CA. Shashi Gupta, FCA38 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.”

39. CA. Shashi Gupta, FCA39 Out of Order – Cash Credit An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the `operating limit’ (sanctioned limit/drawing power whichever is low); 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, or; credits are not enough to cover the interest debited during the same period

40. CA. Shashi Gupta, FCA40 Identification of an A/c as NPA An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. It is the borrower that is treated as NPA, not a particular facility Identify exact date of NPA

41. CA. Shashi Gupta, FCA41 Identification of an A/c as NPA Term Loan – –Interest and/ or installment of principal remain overdue for a period of more than 90 days. –In cases where the interest is charged on monthly basis, if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter. Overdraft/Cash Credit - account remains ‘out of order’ for a period of more than 90 days Bills Purchased and Discounted – Bill remains overdue for a period of more than 90 days Securitization – Amount of liquidity facility remains outstanding for more than 90 days undertaken in terms of guidelines on securitisation dated February 1, 2006.

42. CA. Shashi Gupta, FCA42 Identification of an A/c as NPA Agriculture Advances: –Short Duration Crops - The installment of principal or interest thereon remains overdue for two crop seasons for –Long Duration Crops - The installment of principal or interest thereon remains overdue for one crop season 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 from the specified due date for payment.

43. CA. Shashi Gupta, FCA43 Identification of A/c as NPA Temporary deficiencies – non-availability of adequate drawing power – balance outstanding exceeding the limit – non submission of stock statements – non-renewal of the limits on the due date is no criteria for classification of NPA Only when there is a threat of loss, or the recoverability of the advances is in doubt (Ref: Master Circular 08.08.2006; 2.2.1.i)

44. CA. Shashi Gupta, FCA44 Identification of A/c as NPA CC/OD: Drawing power is based on stock statement. In case it is older than 3 months and if such irregularity continues for a continuous period of 90 days thereafter. Example: if the last stock statement received from borrower is for the month of July (due date 10th August) the account would become irregular on 10 November and NPA on 11th February next year

45. CA. Shashi Gupta, FCA45 Identification of A/c as NPA Other facilities: If the regular/ad-hoc facility is not reviewed/ renewed/ regularized within 180 days (normal period 3 months) from the due date of renewal/date of sanction. If investments in borrower are classified as Non Performing Investments

46. CA. Shashi Gupta, FCA46 Clarifications Asset Classification To be borrower-wise and not facility wise. Of accounts under consortium to be based on record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances

47. CA. Shashi Gupta, FCA47 Clarifications Asset classification In respect of agricultural advances as well as advances for other purposes granted by banks to ceded PACS (Primary Agricultural Credit Society)/ FSS (Farmers Service Society) 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

48. CA. Shashi Gupta, FCA48 Clarifications Asset classification Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs. In case of Loans with moratorium for payment of interest – interest becomes due only after the moratorium or gestation period is over.

49. CA. Shashi Gupta, FCA49 Clarifications Asset classification Central Govt. Guaranteed accounts should not be classified as NPA to the extent of Guaranteed Amount Govt. Guaranteed advances though overdue becomes NPA only when the Government repudiates its guarantee when invoked. Accounts regularized near about balance sheet date - banks must furnish satisfactory evidence about manner of regularization of the account with respect to source of deposit.

50. CA. Shashi Gupta, FCA50 Clarifications Asset classification NPA purchased by bank for a period of 90 days are regular. Thereafter, if the recovery is as estimated at the time of purchase, than it is Standard.

51. CA. Shashi Gupta, FCA51 Sub-Standard Asset: NPA for a period less than or equal to 12 months

52. CA. Shashi Gupta, FCA52 Doubtful Asset: Remained in the sub-standard category for a period exceeding 12 months. Serious credit impairment - Realizable value of security less than 50 % of value assessed.

53. CA. Shashi Gupta, FCA53 Loss Asset: 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 Erosion in value of security - If value of security less than 10 % of outstanding

54. CA. Shashi Gupta, FCA54 EXCEPTIONS NPA’s should be straightaway classified as doubtful/loss asset: –If the realizable value of security is less than 10% of the outstanding advance provided the advance was not unsecured ab-initio. An advance is considered unsecured ab initio, if the realizable value of security is not more than 10% of total exposure to the borrower at the time of sanction. –There is potential threat for recovery due to erosion in security value or non availability of security and existence of other factors such as frauds committed by borrowers

55. CA. Shashi Gupta, FCA55 Agricultural Advances Long Duration Crop – crop season longer than one year (raising of crop to harvest) Short Duration Crop – crop other than Long Duration Period of Short Duration could differ from State to State, to be determined by State Level Banker’s Committee NPA – After two crops for Short and one crop for Long

56. CA. Shashi Gupta, FCA56 Income recognition

57. CA. Shashi Gupta, FCA57 Income recognition Not to charge and take to income account interest on any NPA. Interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies is allowed to be taken to income account on the due date, provided adequate margin is available in the accounts. Fees and commissions earned as a result of re- negotiations or rescheduling of outstanding debts – on accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit. Government Guaranteed Advances which become NPA, the interest on such advances cannot be taken to income account unless the interest has been realised.

58. CA. Shashi Gupta, FCA58 Reversal of Income If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, is required to be reversed or provided for if the same is not realized. Applicable to Government guaranteed accounts also.

59. CA. Shashi Gupta, FCA59 Reversal of Income In respect of NPAs, fees, commission and similar income that have accrued in the past, cease to accrue in the current period, a reversal of provision of amounts relatable to past periods, if uncollected, is required to be made. In respect of leased assets, the finance charge component of finance income [AS 19] on the leased asset which has accrued and was credited to income account before the asset became non-performing, and remaining unrealised, is also required to be reversed or provided for in the current accounting period.

60. CA. Shashi Gupta, FCA60 Appropriation of recovery in NPAs Interest realized on NPAs is allowed to 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. As per agreement, banks may adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner (towards principal or interest due)

61. CA. Shashi Gupta, FCA61 PROVISIONING

62. CA. Shashi Gupta, FCA62 PROVISIONS – Standard Assets –direct advances to Agricultural and Small and Micro Enterprises (SMEs) sectors at 0.25%; –advances to Commercial Real Estate (CRE) Sector at 1% –advances to Commercial Real Estate - Residential Housing Sector at 0.75% (new) –Provisioning for housing loans at teaser rates – 2% (revert to 0.4% after 1 yr of shift to higher rate) –Restructured : Standard Advances – 2% for first 2 years and period of moratorium –Restructured : NPA to Std Advances – 2% for first year from the date of upgrading –other loans and advances 0.40%

63. CA. Shashi Gupta, FCA63 PROVISIONS – NPA Loss Asset – 100% Doubtful – unsecured portion 100% –secured portion (%) Up to one year 25 One to three years 40 More than three years 100 Sub-standard –15% on Total o/s –Addl. 10% on unsecured part ; i.e. total 25% (with certain safeguards such as escrow accounts available, infrastructure loan accounts will attract a provisioning of 20% instead of 25%)

64. CA. Shashi Gupta, FCA64 PROVISIONS – NPA Lease Assets – Separate rates Amounts held in Interest Suspense Account should not be reckoned as part of provisions ECGC guaranteed - provision only for the balance in excess of the amount guaranteed. Further, realizable value of the securities should first be deducted from the outstanding balance before calculating ECGC cover. Provisioning for country risk, other than for loss assets (0.25 -100%; category A1 to D). Projects under implementation – separate guidelines

65. CA. Shashi Gupta, FCA65 T H A N K S