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RBIA-in-bank.pdf
- 1. RISK BASED AUDIT IN BANKS (with relevance to bank branch) (with relevance to bank branch)
- 2. Outcomes • Understanding RBIA • Understanding approach and methodology of RBIA • Comprehending various vulnerable areas of control lapses to be seen audit
- 3. Change in approach in concurrent Audit Earlier- transaction testing Now Risk based auditing • Reliability of accounting •Assessment of Business risk in • Integrity Timeliness of control reports • Adherence to regulatory norms •Transaction testing Business risk in activities undertaken by bank. •Evaluation of Control Risk
- 4. Scope of RBIA • It should report – Proper recording and reporting of Major excess and exceptions • The extent of transaction testing would be on the basis risk profile of the bank/branch. on the basis risk profile of the bank/branch.
- 5. • Identification of risk in functions • Evaluation of risk • Evaluation of risk • Making an assessment of level and direction of various risk • Drawing up Risk matrix of the branch.l
- 6. Risk Classification Risk at Branch level Risk Classification Business Risk Control Risk
- 7. Business Risk Credit Risk Operational Risk Earning Risk
- 9. Risk score methodology(Illustrative) Business Risk Individual Parameter Risk Scale Risk score Fresh slippage in NPA’s (Amt wise %) 0% >0% to 0.50% >0.50% to 1% >1% 0-20 21-40 41-60 61-70 Total Business Risk score xxx score Control risk Parameter Risk weight (1-5) Marks Scale (2-10) Risk score (WXM) Adherence to loaning power 5 5 25 Total control risk score xxx
- 10. Upto 30% Score Upto 30% Score Low Risk Business Risk Control Risk Risk categories and Scale (Illustrative) 30-60% Score 30-50% Score >60% Score >50% Score Medium Risk High Risk
- 11. BUSINESS RISK CONTROL RISK Maximum Marks 1000 1000 Marks Obtained Overall Risk Summary Risk score (Marks Obtained as %age of max Marks) Risk Category DIRECTION OF RISK
- 12. Risk Matrix Business Risk High A High Risk B Very High Risk D Medium D High F Very High C Extremely High Risk Inherent Business Risk Medium Low Medium Risk High Risk Very High Risk F High Risk H Medium Risk G Low Risk Control Risks
- 13. CREDIT RISK Portfolio Risk Default Risk Internal Factors •Deficient loan policies •Deficient Administration •Absence of Prudential Credit Policy norms •Absence of Credit Concentration limit •Inadequate lending limits to officers •Deficiency in appraisal •Excessive dependence on collaterals •Inadequate risk pricing •Absence of loan review •Deficient Post Sanction Surveillance External Factors •Economy •Price Swings of Commodities •Foreign Exchange Rate •Interest Rates •Trade Restrictions
- 14. Business risk-Credit function • Credit Growth – No of new Accounts from earlier period – Migration of Accounts • Composition & credit concentration – Segment/Industry – Borrower wise – Borrower wise – Sensitive sectors • Credit quality – %Gross NPA to Total Advances – Fresh Slipages – Irregular Accounts to Total Advances – Infant mortality • Credit risk of off balance sheet Items
- 15. RECENT INDUSTRY OUTLOOK AS PER ICRA (Valuable for auditors for identification of credit (Valuable for auditors for identification of credit risk)
- 16. Industry Outlook Key Issues Real Estate & Construction Negative •No respite on raw material front •Shortage of labour and funds •Difficulty in accessing bank funding •Increased reliance on Non-traditional sources (NBFCs, Private Equity Funds, etc.) etc.) Auto Ancillaries Stable •Increased focus on cost compression •Slow demand recovery Cement Positive •Increase in demand owing to recovery in economy, low base effect, etc.
- 17. Industry Outlook Key Issues Oil & Gas Stable •Favorable domestic demand-supply scenario •Proposed rise in natural gas price •Downstream players expected to witness fall in under-recovery levels •Regulatory clarity on the powers of The Petroleum and Natural Gas Regulatory Petroleum and Natural Gas Regulatory Board(PNGRB) is required. Textiles Negative •Companies face risk emanating from policy changes by China for cotton procurement •This might affect export demand of Indian yarn
- 18. Industry Outlook Key Issues Auto Positive •Recovery in volume of commercial vehicles supported by replacement demand, reduction in excise duty, low base effect, etc. •Increased focus on exports by OEMs (Passenger Vehicles) Telecom Positive •Restoration of pricing powers •Continued uptick in the data services •Leveraging of leading telcos increased driven mainly by debt funding (auction- determined payouts & sizeable capital expenditure) •Gradual organic de-leveraging is expected
- 19. Earnings risk- Business strategy risk • Low cost deposit target achievement • Increase/Decrease in low cost deposit(SF+CA) • Credit % budget achievement • Priority sector advance (% Budget Achievement) • Profit (% Budget Achievement) • Disbursement in Retail lending (% Budget Achievement) • Average cost of deposit • Average return on advances • Non Interest income growth • Avg business per employee • Revenue leakage(% to total profits during review period) • Reduction in controllable expenses
- 20. Operational Risk • Depositors with >1% share • Non-Compliant A/c • Instances of Window Dressing • Alternate Delivery Channels(Mobile, • Alternate Delivery Channels(Mobile, Internet, POS, ATM, NEFT, RTGS, Credit/ Debit Card) • Record maintaining & Loss Data • Cases lodged to Ombudsman
- 21. • Penalties imposed in courts, IT, Consumer forum, etc. • Frauds detected & recovery made • Outsourcing/ Other Service Providers – Maintenance of ATM/ Computer – Courier – Courier – Security Guard – Maintenance of SFF lockers – Recovery Agents – Other services like Sweepers
- 22. Control Risk
- 23. Control Risk Control Risk Control Risk Control Risk Credit function •Exercise of loaning power •Pre sanction appraisal •Documentation creation of charge •Mortgages •Mortgages •Post sanction monitoring and follow-ups •Bill purchased/ Discounted •NPA management •Revenue audit in credit
- 24. Non miss-out areas in credit audit Credit: • Pre sanction • CIBIL not checked and Negative CIBIL settlement must be justified in writing + NOC (FS) • RBI default list, KYC, statement of Bank A/c, other returns like IT,VAT must be confirmed.(FS) • Assessment done on old B/s. • B/s Sheet sensitive items – Unsecured loans – Unsecured loans – No impairment of assets, No accounting policies , no bank name in B/s disclosure for charges created. – No justification of qualified audit reports. – No disclosure/assessment of contingent liab. – High variations in sales +sales not commensurate with Credit summations. – FD against BG to be considered as non current Asset. – Proper calculation of NWC. – Unmoved advances to supplier- Non current •
- 25. Contd • Credit report in current account is also required. • Business cycle assessment not done. • No justification obtained for sudden shift of figures (sales, Profit, Debtors, stock) in projections given and actual B/s submitted. • Assigned LIC policies under sec.6 of Married women’s Property Act. Property Act. • Guidelines of takeover of loans followed. • Diversion of short term funds to long term assets must be justified in writing. • EMI’s to residual income in the hands of borrowers. • Valuer’s qualification and approved jewelers.
- 26. Post sanction: • End use of funds not checked with proof (ND) • Original title deeds, valuation report to be kept on record. Valuation may be done on renewal also.(ND).large accounts vetting by advocate for validity of documentation • Overdue renewals- No follow up , renewal on old balance • Overdue renewals- No follow up , renewal on old balance sheets, Provisional B/s and actual differs significantly. • Adhoc limits given only in eligible cases with justification from borrower in writing must be obtained. No loaning power has been exceeded (ND)
- 27. • Stock statement not received/checked over 3 mnths still operations are allowed.(FS) • Limitation expired during next 12 months • Acknowledgement of debts Balance confirmation taken from borrowers and from legal heirs in case of taken from borrowers and from legal heirs in case of death of borrower regularly.(ND) • Changes in partnership/director – deed must be obtained on every review/renewal –change in internal environment of the borrower
- 28. • Non claiming subsidy on eligible loan accounts • Visit report: must address business risk of the borrower , • Bill discounted : LR of only approved transporters+ Accomodation bills are not purchased • BG’s are properly worded and recorded in Bank registers + limitation clause must be entered .
- 29. • Delay in insurance -Un-insured period, all risks not covered • In case of staff veh.loan joint registration is obtained+ in case of staff loan Int rate modified after retirement or resignation.(FS) • No process of balance confirmation from debtors at borrowers level
- 30. • Diversification of funds • Overdue accounts brought in limit temporarily and subsequently allowed to be withdrawn. • Creation of charge-latest documents must be obtained and on renewal also it must be obtained.(FS) • Limits to be adjusted especially when industry faces problem or slowdown. • Half yearly rating should be done for large borrowers, so that upward/ downward movement can be tracked.
- 31. • If there is no variation in rating inspite of industry issue, then financials of the borrower are not correct. • Take over case turning into NPA(Potential weakness) • Large no of cash withdrawals in CC account which does not seems to be need based. • Erosion of primary/collateral security is seen at the time of visit and reported
- 32. Non credit function • Cash Management • ATM • Suspense account • Sundry Account • Checking of Reports • Checking of Reports Morning checking • Opening of a/c KYC norms ACCOUNT OPENING
- 33. Non miss out audit areas • Non generation and checking of Control reports , exception report , statement of ALM,,DD purchased and returned unpaid., loans sanctioned under BM’s power.(FS) • Pendency in signature scanning(FS) • Confirmation of actions of officiating manager by permanent incumbent(ND) • Proper registers are being maintained for cash and checked at prescribed intervals. at prescribed intervals. • Proper control over tokens is being exercised. • Daily reconciliation of Clearing Imprest account; Parking difference in a dummy account not allowed. • Timely clearance of sundry and suspense Accounts(FS) • Overdependence on outsourced service. • Failure /success report of interest application not checked. •
- 34. Non miss-out areas • Non implementation of KYC guidelines • Nomination is signed by witness • Correct risk classification of customer not done – Very High Risk- Politically exposed person and relatives – High risk – NRI’s, HNI’s, businessmen of antique dealers, dealers in arms etc. firms with sleeping partners, Trusts, charities, NGO etc charities, NGO etc – Medium risk- Current account having Dr/cr summation of Rs.50 lakh pa, whom they do not provide enough documentary proof etc. – Low risk- salaried person, small accounts. • Introducer’s procedure is prudently • Risk fencing in case of doubtful or Non KYC compliant customers . Ex, stopping chq book issue,ATM cards etc. system also displays “Caution” while making payment.
- 35. • Conduct maintenance of a/c and Records • Security Forms Inventory Management • Bills for collection, DD Receivables Parcels • Conduct of Govt. Business • Safe Deposit Vault
- 36. Computer function • Environmental Assessments • Physical/ Logical Accesses • Maintenance Business Continuity Controls • Networking Controls • Networking Controls • Operational Controls
- 37. Compliance functions • Status of previous Insp. Report • Submission of Crucial Returns • Communication Response • Regulatory Compliance
- 38. Brach management • General I. Staff Knowledge II.Upkeep of Branch Premises III.Expenditures IV.Punctuality/ Discipline V.Rotation of Duties Placement of Staff Placement of Staff • Security I. Security Infrastructure II.Security Manpower Equipments III.Security Procedure IV.Fire Safety
- 39. Relevant Provisions Banking Regulations Act, 1949 for auditors at 1949 for auditors at branch
- 40. Section Important clauses 20 Restriction on loans and advances: No banking company shall- • Grant loans or advances on security of its own shares • Enter into any commitment for granting any loan or advance to- I. Directors II.Firm in which director is interested as II.Firm in which director is interested as partners, managers, employee or guarantor III.Any director of banking company is a director, managing agent, employee or guarantor, or in which he holds substantial interest IV.Any individual in respect of whom any of its directors is a partner or guarantor
- 41. Section Important clauses 20 No cooperative bank shall: I. Make loans and advances on security of own shares II. Grant un-secured loans or advances to- • Directors • To firms of private company in which any of its • To firms of private company in which any of its directors is interested as partner of managing agent or guarantor • To company in which chairman of BOD of co- operative bank is interested
- 42. Section Important clauses 23 RBI permission required for:- • Opening new place of business in India. Temporary place of business allowed only for 1month be operated on occasion of mela, Exhibition, conference 26 Returns of unclaimed deposits to be submitted for accounts which are not operative for 10 years RRB’s to furnish details to sponsoring bank RRB’s to furnish details to sponsoring bank 45ZB No notice of claim of other person than depositor shall be receivable by bank for payment except in case of decree, certificate from court of jurisdiction 45ZC The bank shall return the articles in the safe custody to the nominee, But in case of minor- any other person appointed to receive the articles. Inventory must be taken
- 43. Section Number Important clauses 45ZE •Hirer of locker may nominate a person to have access to the locker in case of death of hirer •In case of joint owners it can be operated under the joint signatory of owners only and •In case of death of any one or both owners then only -Nominee then only -Nominee 47A(5) Power of RBI to impose penalty: • Payment of penalty within 14 days from the date on which notice by RBI is served on the banking company
- 44. Vigilance risks • AML – Unusually large transactions – Account is opened by customer far from his house without acceptable reason – The trend/pattern of transaction does not fit economic rationale rationale – Unusually high value transactions other than cash – Unexplained transfer between multiple accounts – Customer often operates safe deposit locker immediately before cash deposits
- 46. Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 • SARFAESI Act empowers secured creditors to recover their dues without the intervention of court. • Under this Act, banks, upon default, can seize the underlying securities • Preconditions: Debt is secured and classified as NPA. Debt is secured and classified as NPA. O/s Dues = 1 Lakh and account for 20% of Principle and Interest thereon. Enforceable security can even be a Mortgaged house, but not an agricultural land (Other exceptions include Personal Belongings). • Banks to give a notice to the defaulter for discharge of liabilities within 60 days and on non-compliance, initiate action.
- 47. AWARDING VALUE TO BUSINESS IS NEVER BY MERE CHANCE, IT IS RESULT OF KNOWLEDGE AND APPLICATIONS WORKING KNOWLEDGE AND APPLICATIONS WORKING TOGETHER Nititn Alshi Associates
- 48. Nitin D. Nitin D. Alshi Alshi B.com, B.com, ACMA., ACMA., FCA, DISA(ICA),PGDERM. FCA, DISA(ICA),PGDERM.