Bank Audit: Minimise bank audit risk by maintaining documentation

Bank Audit: Minimise bank audit risk by maintaining documentation: Train ur staffs to Identify NPAs: By CA Nitesh More

1) Our audit risk is minimized If:

a)    We are able to identify & recognize the NPAs properly,

b)    We maintain proper documentation of our audit.

Otherwise if subsequently, RBI inspector detect additional NPAs & on that basis , if RBI complain to ICAI, one may be in trouble.

2) TRAIN YOUR STAFFS TO IDENTIFY NPAs: Identification of the NPAs is one of the major Task in Bank Branch audit. If your article clerks & other staffs are able to identify the NPAs than you will be able to implement proper income recognition & provisioning norms as per RBI guidelines. So train your article clerk to indentify the NPAs.  

3) Non performing Assets : An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank. A non performing asset (NPA) is a loan or an advance where;

i. Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,

ii. The account remains ‘out of order’ as indicated at paragraph 5 below, in respect of an Overdraft/Cash Credit (OD/CC),

iii. The bill remains “overdue” at paragraph 6 below for a period of more than 90 days in the case of bills purchased and discounted,

iv. The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,

v. The instalment of principal or interest thereon remains overdue for one crop season for long duration crops,

vi. The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitization transaction undertaken in terms of guidelines onsecuritization dated February 1, 2006.

vii. 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 from the specified due date for payment.

4) In case of interest payments, banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. In addition, an account may also be classified as NPA in terms of paragraph 4.2.4 of this Master Circular.

5) ‘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'.

6)  ‘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.

7)  INCOME RECOGNITION

7.1 Income Recognition Policy

7.1.1 The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. This will apply to Government guaranteed accounts also.

7.1.3 Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the renegotiated or rescheduled extension of credit.

7.2 Reversal of income

7.2.1 If any advance, including bills purchased and discounted, becomes NPA, the entire interest accrued and credited to income account in the past periods, should be reversed if the same is not realised. This will apply to Government guaranteed accounts also.

7.2.2 In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed with respect to past periods, if uncollected.

 CA NITESH MORE

 Depreciation on Fixed Assets in Banks 

After reading Accounting policy of different banks it has been noted that they refer to "Guidelines of RBI" as regard to Depreciation on computers, but no such guidelines available. The Expert panel for Bank Audit of ICAI also failed to furnish any such guidelines so far.

Besides this some banks are providing depreciation on computers for full year irrespective of date of addition. For other assets some are applying rates of companies act, some are using Income Tax 1961 rates. Some are using 182 days, some are using 180 days and some are using 30th Sep as the period for providing half depreciation. When Each and every bank is having different set of policy as regard to Depreciation how it can be said that they are providing depreciation as per RBI Guidelines or their results are comparable.

Following are extracted from Accounting Policy (schedule-17) of the banks:

Central Bank of India 

·  Fixed Assets (other than computers which are depreciated on Straight Line Method) are depreciated under 'Written Down Value Method’ 

·  Depreciation on additions to assets, made upto 30^th September is provided for the full year and on additions made thereafter, is provided for the half year. No depreciation is provided on assets sold before 30^th  September and depreciation is provided for the half year for assets sold after 30^th  September.

State Bank of India

·        In respect of assets acquired during the year for domestic operations, depreciation is charged for half a year in respect of assets used for upto 180 days and for the full year in respect of assets used for more than 180 days, except depreciation on computers and software, which is charged for the full year irrespective of the period for which the asset was put to use.

Punjab & Sind Bank

·        Depreciation is provided for on Computers at 33.33%, on straight-line method; additions are depreciated for the full year irrespective of the date of addition as per RBI guidelines. 

·        Other Fixed assets on written down value method at the rates prescribed by the Income Tax Act 1961; additions effected before 30th September are depreciated for full year and additions effected thereafter are depreciated for half year. 

·        No depreciation is provided on assets sold/disposed of during the year.

State Bank of Hyderabad

·        In respect of assets acquired during the year, depreciation is charged for half year in respect of assets used for up to 182 days and for the full year in respectof assets used for more than 182 days, except depreciation on computers/ATMs and software, which is charged for the full year irrespective of the period for which the asset was put to use

·        The rates of depreciation and method of charging depreciation are as under : 

·        Computers/ATMs                              SLM                                         33.33% every year 

·        Computer software forming an integral part of hardware                     WDV                                        60%

·        Computer Software which does not form an integral part of hardware                                           100%, in the year of acquisition

Oriental Bank of commerce

·        Depreciation on assets (including revalued assets), is charged on the Written Down Value at the rates prescribed by the Income Tax Rules, 1962; except in respect of computers on which depreciation is provided on Straight Line Method @ 33.33% as per RBI guidelines

·        Depreciation is not provided in the year of sale/disposal of asset;

Bank of Baroda

·        Depreciation on Fixed Assets, other than on computers, is provided under the written down value basis at the rates prescribed in Schedule XIV to the Companies Act, 1956. 

·        Depreciation on computers is provided on Straight Line Method at the rate of 33.33% in line with theguidelines of Reserve Bank of India 

·        While depreciation on additions is provided for full year, no depreciation is provided in the year of sale/disposal.

Dena Bank

·        Depreciation is charged on Written Down Value (W.D.V.) method at the rates prescribed under the Income Tax Rules, 1962 except Computer hardware purchased before 01.04.2000 are depreciated @ 25% p.a. on W.D.V. method and purchased on or after 01.04.2000 are depreciated @ 33.33% on Straight Line Method.

United Bank of India

·        Software are capitalized with computers

·        Depreciation on assets other than computers, ATMs and Software is provided for under written down value method, in the manner and as per the rates prescribed under Schedule XIV to the Companies Act, 1956. The rate is rounded off to next absolute number. Depreciation on the revalued portion of the assets is adjusted from Revaluation Reserve. 

·        Depreciation on computers, Automatic Teller Mahchine (ATM) and software are provided on straight-line method @ 33.33% on pro-rata basis from the date of acquisition as per RBI guidelines.

Canara Bank

·        Fixed Assets excluding Computers are depreciated under Written Down Value Method at the rates determined by the management on the basis of estimated useful life of the respective assets. As per theguidelines of Reserve Bank of India, depreciation on Computers is charged at 33.33% on Straight-Line Method. 

·        Depreciation on additions to fixed/leased assets is charged for the full year irrespective of the date of acquisition.  No depreciation is provided in the year of sale/disposal.