Concurrent Audit Day 1

EFFECTIVE CONCURRENT AUDIT
LEGAL AND REGULATORY FRAMEWORK
CMA (Dr.) Puvvala Siva Rama Prasad

M.Com., MBA (Finance)., FCMA., FCS., FIIBF., FIII (Life & General)., MAIMA
Effective Concurrent Audit
CD Ratio – Credit Deposit Ratio
 Loans & Advances.
 Investments.
TWO Books in Banking Business
 Banking Book.
 Trading Book.
Why Concurrent Audit ?

Three Types of Risk in Banking Industry:
 Credit Risk.
 Market Risk.
 Operational Risk (People, Process, Technology & External Compliance)
(To Mitigate the above THREE Risks – “Concurrent Audit” play Vital
Role)
Why Concurrent Audit ?

If Risks are NOT Mitigated. The following are the Challenges to Banks:
 Requires Provisions.
 Additional CAR / CRAR.
 Asset Liabilities Management (ALM) Mis-Match.
 Pressure on Bottom-Line (Net Profit).
 Impact on Bank’s Rating – Like CAMELS etc. / Prompt Corrective Action

(PCA).
BROADLY THREE TYPES OF RISKS IN THE BANKING INDUSTRY
 CRM – Credit Risk Management

 ORM – Operational Risk Management
 MRM – Market Risk Management
AT BRANCH LEVEL
 CRM
 ORM
AT TREASURY LEVEL
 MRM
 ORM
Specialization of Concurrent Audit
- RACPC – HL, EL, CL, PL, MLs.

- SMECCC – WC / TL.
- TFCPC – BGs, LCs, Bills Discount.
- LCPC.
- CCPC.
- CPPC.
- Treasury Audit.
- Currency Chest Audit.
- SWIFT Audit.
- FEMA Audit.
- KYC / AML Audit.
- Credit Audit.
- Stock / Book Debts Audit.
- SAMB (Stressed Assets Management Branch).
AGENCIES FOR SPECIALIZED MONITORING (ASM)
Specialized Monitoring of Loan Accounts where the Collective Exposure is ₹.500
Crores and above.
Basic Information about the Branch
- Category of the Branch – Grade.

- Branch Dossier – Assets / Labilities & Income / Expenditure.
- Number of Divisions (Accounts, Loans & Advances, Forex, Cash, Clearing,
Agriculture).
- Currency Chest or Hand Balance Branch.
- Forex Authorised Dealer or Not (Category like A, B or C).
- Manpower (Supervising, Executives and Subordinates).
Basic Information about the Branch
- RFIA, Credit Audit, Stock-Book Debts, Income-Leakage, Statutory Audit Reports .

- Advance Oriented / Deposit Oriented Branch.
- Number of ATMs / CDMs – Alternate Delivery Channels including Business
Correspondences).
- BPR Centre / CPCs.
- Controller of the Branch.
- Number of Frauds Pending.
- Number of Complaints pending – COPRA / Banking Ombudsman.
Tools for Concurrent Audit
 Loan Balancing File.
 Delegation of Financial Powers – DFB – (Branch / CPC) including Divisions.
 Credit Management Guidelines – Loan Policy of the Bank.
 SOPs – Housing Loans, Education Loans, Car Loans etc.
 Bank Internal Circulars – Product-wise / Interest Rates on Deposits /
Advances.
Tools for Concurrent Audit
 Documentation Guidelines.
 Stamp Duty.
 Registration Act – EM / RM – Primary / Collateral.
 Limitation Act / CERSAI Act / SARFAESI, 2002 / IBC, 2016 etc.
 Pre-sanction, Sanction and Post Sanction Guidelines of the Bank.
Tools for Concurrent Audit – Contd.. ..

Manuals (LCs / BGs etc.).
Service Charges Book-let (Processing Charges, Penalties for Non-submission
of Stock Statements / Bouncing of Cheques (PDCs) etc.).
CIBIL / RBI Defaulters List.
Systems & Procedure Book-lets / Book of Instructions.
Job Cards,
Knowledge on Loan Originating System (LOS) etc.
CBS / TMS Manuals – Core Banking Solutions / Treasury Management
Solutions.
ONLINE / WEB BASED CONCURRENT AUDIT
- Manual Concurrent Audit.
 On-line Concurrent Audit (Web-based) - WEBCAS.
 Knowledge on OTMS / RADAR System etc.

Value Statements
List of Areas / Items to be verified by the ‘Concurrent Auditor’ - Relevant to

Various Products of the Bank.
Thorough Knowledge about “All Bank Products” and its Characteristics.
Source: SOPs / Bank Book of Instructions / Manuals of the Bank / Circulars etc.
Minimum areas of Coverage under Concurrent Audit
1. Cash transactions including physical verification of cash, etc.
2. Loans & Advances including physical verification of securities, delegation of Powers for sanction, Security Charge
Creation, end use verification of funds, monitoring of accounts with excess drawings, monitoring of projects, etc.
3. Adherence to KYC / AML guidelines including monitoring of transactions in accounts, compliance with Foreign Account
Tax Compliance Act (FATCA) and Common Reporting Standards (CRS), monitoring of transactions in new
accounts/staff accounts, reporting of CTR/STR, etc.
4. Remittances/ Bills for Collection including SWIFT transactions, monitoring of overdue statements (bills purchased /
discounted / negotiated, etc.).
5. House Keeping including reconciliation of accounts, monitoring of General Ledger/Subsidiary General Ledger/Parking
Accounts, opening of internal accounts, etc.
6. Treasury operations.
Minimum areas of coverage under Concurrent Audit
7. Non fund based business.
8. Foreign Exchange transactions.
9. Clearing transactions.
10. Verification of Merchant Banking Business.
11. Verification of Credit Card / Debit card business.
12. Conduct of employees, mis-selling of products, etc.
13. Compliance to RBI guidelines and internal Policy guidelines issued from time to time.
Important Circulars Issued by RBI

 Master Circular / Master Directions:
 Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning
(IRAC) dated July 1,2015.
 Master Directions on Frauds–Classification and Reporting by Commercial Banks and

selected FIs.
 Master Direction - Priority Sector Lending-Targets and Classification (updated as on December

04, 2018).
 Master Direction - Know Your Customer (KYC) Direction, 2016 (Updated as on July 12, 2018).
 Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector (Updated as on
April 25, 2018).
Relevant Circulars applicable for NPAs
 Other Circular / Notifications:
 Guidelines on Loan System for Delivery of Bank Credit - Conversion of Working Capital into
Term Loan- December 5, 2018.
 Priority Sector Lending – Targets and Classification dated March 1, 2018 - Foreign Bank &
Services Sector.
 Relaxation to MSME borrower - Encouraging formalisation of MSME Sector 6th June,2018.
 Priority Sector Lending – Targets and Classification June 19,2018 - Housing Loan.
 Micro, Small and Medium Enterprises (MSME) sector – Restructuring of Advances dated January
1,2019 & February 22, 2019.
 Interest Subvention Schème for MSMEs dated February 2,2019 etc.
Auditors Must Know
 Functioning of the Bank Branches.
 Products Handled by Bank.
 High Risk areas in the Bank.
 Concurrent Audit Reports – In Reports folder.
 Understand CBS System.

Pre-commencement Planning Procedures and Execution of

Concurrent Audit
 Staff Appointed for Audit to be Trained Properly.
 Training from the Bank on Concurrent Audit.
 Ask the Bank Management to provide on-site training of CBS.
 One of senior auditor should also attend for this training along with
Assistants.
Pre-commencement Planning Procedures and Execution of

Concurrent Audit
 A Check list / Value Statements covering audit program should be

provided to audit staff.
 List out the items to be Physically Verified in the bank.
 List out the activities to be done on Weekly / Fortnightly and monthly

Basis particularly in ORM areas.
Pre-commencement Planning Procedures and Execution of Concurrent

Audi
 Efforts should be made for Spot Rectification. It will help in Minimizing the
incidence of the serious irregularities and fraudulent manipulations.
 Communication – Auditor must know the Process of Communication to

Inspection Department and who is the co-coordinator for Concurrent Audit.
 In case any Fraudulent Transaction found or serious laps found, do not wait for
report, and communicate immediately to appropriate authority.
Legal and Regulatory Framework

Areas
 Bank Functions.
 Deposits ( KYC / AML, Different Types of Accounts, Deficiency of Services etc.)
- Advances
 Pre-sanction (KYC, Regulatory Guidelines, Income Documents etc.).

 Sanction (Terms & Conditions, Delegation of Powers etc.).
 Post Sanction (Documentation, Recovery – DRT, SARFEASI, 2002, IBC, 2016 etc. ).
 Miscellaneous Business
 Lockers, Safe Custody Articles, Selling of Third Party Products etc.
 Indian Stamp Act

 Registration Act – EM / RM – Primary / Collateral
 CERSAI – Movable and Immovable Securities
 Limitation Act – Section 18 an Section 19
 POA – NRIs – HL – Legal Opinion

 BR Act - SLR – Nomination Act / RBI Act – CRR etc.
 LLP, Partnership Act, Companies Act, Trust Act, Societies Act etc.
 Limitation Act / CERSAI Act / SARFAESI, 2002 / IBC, 2016 etc.
 FIMMDA Act
 FEMA Act
 FEDAI Guidelines
 RTI Act
 COPRA Act
 Banking Ombudsman Act etc. etc.
Value Statements
Proposals conform to Bank's lending policy / RBI / Govt. guidelines and

Prudential exposure norms.
Value Statements
Accurate description and nature of charge (hypothecation / mortgage)

along with ranking of charge (first / second / Pari passu) of both primary and
collateral security
Deficiencies pointed out in TIR clearly shown in the appraisal
memorandum.
Value Statements
TIR obtained from empanelled lawyer in standard format confirming
genuineness of title deeds and unqualified right of the Bank to enforce the
mortgage and duly verified and recorded on Annexure E.
Original search fee receipt covering 13/30 years and certified copies of
title deeds issued by SRO are obtained.
Root / Chain of documents have been adequately furnished.
List of original / certified / Photostat copies of documents to be deposited
for creation of valid mortgage mentioned in TIR.
Demarcation of land, boundaries and extent of land clearly specified.
Value Statements
Appropriate / Prescribed documents obtained from both from the

Borrower/Guarantor against acknowledgement.
Personal Guarantee of owner of the collateral security property is taken.
Documents Adequately Stamped.
Documents entered in Documents Execution Register.

Value Statements
Latest RBI defaulters list, Willful defaulters list, CIBIL ECGC caution list,
Suit filed / Witten-off and Compromised Account list on borrowers /
guarantors
Status of Irregular Loans reported in CIBIL report commented upon in
appraisal note for taking credit decision.
PoA properly executed covering all related areas, duly verified and
recorded in PoA Register.
Execution of Documents done as per extant instructions of the Bank.
Value Statements
Creation / Extension of EM / RM has been done at a Notified centre in respect of

all properties mentioned in sanction.
All records relating to creation of EM like proper recording of recital in title

deeds register, Memorandum of Deposit of Title Deeds containing the correct
description of the title deeds duly certified / signed, Confirmation letter sent by
registered post on a subsequent date etc. are proper and available on records.
Records with CERSAI have been verified before creation / extension of mortgage.
Value Statements
NOC from Builder / Lending institution / Housing Society etc. are held on record.
Share Certificates, possession certificates wherever applicable, are held with

documents.
Creation / Modification of EM / RM has been registered with CERSAI, Printout

held on record and ID noted in CBS.
CERSAI Charges have been recovered.

Value Statements
The activity for which the loan or limit is sanctioned, falls under the ambit
of Priority Sector prescribed by RBI and proper classification is observed
in CBS at the Branch.
NEW Legal Framework – BANK LOANS

BACKGROUND
 The Insolvency and Bankruptcy Code, 2016 (“Code”)

which seeks to streamline and consolidate bankruptcy,
insolvency and liquidation laws in India was introduced in
Lok Sabha on December 21, 2015 by Finance Minister, Mr
Arun Jaitley.
 Subsequently, after incorporation of several comments
given by the Joint Committee of Parliament the Code was
finally passed by Lok Sabha and Rajya Sabha on May 5,
2016 and May 11, 2016 respectively.
 Finally, the Code received the assent of the President on
the 28th May, 2016.
THANK YOU
CMA (Dr.) Puvvala Siva Rama Prasad

M.Com., MBA (Finance)., FCMA., FCS., FIIBF., FIII (Life &
General)., MAIMA

Concurrent Audit Day 1

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EFFECTIVE CONCURRENT AUDIT

LEGAL AND REGULATORY FRAMEWORK

CMA (Dr.) Puvvala Siva Rama Prasad

CD Ratio – Credit Deposit Ratio

 Loans & Advances.

TWO Books in Banking Business

Why Concurrent Audit ?

 Operational Risk (People, Process, Technology & External Compliance)

Why Concurrent Audit ?

 Additional CAR / CRAR.

 Asset Liabilities Management (ALM) Mis-Match.

 Pressure on Bottom-Line (Net Profit).

 Impact on Bank’s Rating – Like CAMELS etc. / Prompt Corrective Action

BROADLY THREE TYPES OF RISKS IN THE BANKING INDUSTRY

 CRM – Credit Risk Management

Specialization of Concurrent Audit

- RACPC – HL, EL, CL, PL, MLs.

Specialization of Concurrent Audit

Specialization of Concurrent Audit

AGENCIES FOR SPECIALIZED MONITORING (ASM)

Basic Information about the Branch

- Category of the Branch – Grade.

Basic Information about the Branch

- RFIA, Credit Audit, Stock-Book Debts, Income-Leakage, Statutory Audit Reports .

Tools for Concurrent Audit – Contd.. ..

ONLINE / WEB BASED CONCURRENT AUDIT

- Manual Concurrent Audit.

 On-line Concurrent Audit (Web-based) - WEBCAS.

 Knowledge on OTMS / RADAR System etc.

List of Areas / Items to be verified by the ‘Concurrent Auditor’ - Relevant to

Thorough Knowledge about “All Bank Products” and its Characteristics.

Minimum areas of Coverage under Concurrent Audit

1. Cash transactions including physical verification of cash, etc.

Minimum areas of coverage under Concurrent Audit

7. Non fund based business.

8. Foreign Exchange transactions.

10. Verification of Merchant Banking Business.

11. Verification of Credit Card / Debit card business.

12. Conduct of employees, mis-selling of products, etc.

Important Circulars Issued by RBI

 Master Circular / Master Directions:

 Master Directions on Frauds–Classification and Reporting by Commercial Banks and

 Master Direction - Priority Sector Lending-Targets and Classification (updated as on December

Relevant Circulars applicable for NPAs

 Other Circular / Notifications:

 Products Handled by Bank.

 High Risk areas in the Bank.

 Concurrent Audit Reports – In Reports folder.

 Understand CBS System.

Pre-commencement Planning Procedures and Execution of

 Staff Appointed for Audit to be Trained Properly.

 Training from the Bank on Concurrent Audit.

 Ask the Bank Management to provide on-site training of CBS.

Pre-commencement Planning Procedures and Execution of

 A Check list / Value Statements covering audit program should be

 List out the items to be Physically Verified in the bank.

 List out the activities to be done on Weekly / Fortnightly and monthly

Pre-commencement Planning Procedures and Execution of Concurrent

 Communication – Auditor must know the Process of Communication to

Legal and Regulatory Framework

 Pre-sanction (KYC, Regulatory Guidelines, Income Documents etc.).

 Indian Stamp Act

 POA – NRIs – HL – Legal Opinion