#TaxmannPPT | Important Changes and Key Issues for Bank Branch Audit 2022

Anil K Saxena, Agarwal & Saxena

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AGENDA

Anil K Saxena, Agarwal & Saxena

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DISCLAIMER

Anil K Saxena, Agarwal & Saxena

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LET’s GET ROLLING! Particulars

Introduction Key Partner level Pre Sign Off Checklist Regulatory Changes during the year

Anil K Saxena, Agarwal & Saxena

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SCB’s GNPA Ratio 14 12

Per Cent

10 8 6 4 2

0 PSB's

PVBs

Sep -19

Mar - 20

FBs

Sep -20

Anil K Saxena, Agarwal & Saxena

All SCBs

Mar - 21 5

SCB’s NNPA Ratio 6.00

Per Cent

5.00 4.00 3.00 2.00 1.00

0.00 PSB's Sep -19

PVBs Mar - 20

FBs Sep -20

Anil K Saxena, Agarwal & Saxena

All SCBs

Mar - 21 6

Growth in SCB’s GNPAs (y-o-y; per cent)

Anil K Saxena, Agarwal & Saxena

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Growth in SCB’s NNPAs (y-o-y; per cent)

Anil K Saxena, Agarwal & Saxena

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SCB’s Quarterly Slippage Ratio - NPA 10.00

Per Cent

8.00 6.00 4.00 2.00

0.00 PSB's

PVBs

FY 17-18

FY 18-19

FBs FY 19-20

Anil K Saxena, Agarwal & Saxena

All SCBs

FY 20-21 9

Provision Coverage Ratio : Provision held for NPA*100/ GNPAs 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00

PSB's Sep -19

PVBs Mar - 20

FBs Sep -20

Anil K Saxena, Agarwal & Saxena

All SCBs Mar - 21

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Analysis of Frauds Rs. In Crores

200000

185468 138422

150000 100000 71543 50000

36342 6801

8703

7363

4071

0 2018-19

2019-20

2020-21

No. of Frauds

Amount Involved

Anil K Saxena, Agarwal & Saxena

Apr 21 - Sep 21

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Analysis of Frauds

As per RBI, India saw 83,638 cases of banking frauds in FY 2020-21 involving Rs 1.38 lac crore On an average, India saw 229 banking frauds per day in FY 2020-21 of which less than 1% has been recovered. 4071 (3,499) banking fraud cases involving Rs 36,342 crore (Rs. 64,261 crore) reported during H1 FY 2022.

Anil K Saxena, Agarwal & Saxena

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What made news during 2022??

RBI Master Circular of 01st October 2021 : RBI revised the Demonetisation SBNs existing circular of 01st July 2015ofon IRACon 08th November 2016 Auditors being targeted for frauds, diversion of funds, non classification of NPAs etc Audit by Press, Government and Public an ongoing process as frauds continue to increase in banking sector.

Anil K Saxena, Agarwal & Saxena

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What made news during 2021??

Mergers of Public Sector Banks – a challenge to the Demonetisation of SBNs on profession.

08th November 2016 RBI expectations with respect to EWS (Early Warning System) and fraud management system

“Audit of Auditors by the regulator” Anil K Saxena, Agarwal & Saxena

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LET’s GET ROLLING! Particulars Introduction

Key Partner level Sign Off Checklist Regulatory Changes during the year

Anil K Saxena, Agarwal & Saxena

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SA 230 Compliance : Important Documents!

Two important documents to be obtained other than documents to ensure SAE:

 STATEMENT OF ACCOUNTS of all Advance accounts CLASSIFIED as NPA through MOC by you – specify reason for classifying/MOC

 STATEMENT OF ACCOUNTS of all potential NPAs which were NOT CLASSIFIED as NPA – specify reasons of not issuing MOC.

Anil K Saxena, Agarwal & Saxena

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Pre Sign Off Checklist – Partner level Relevant for the Signing Partner

To Ensure

All risks/ departments have been covered during the course of audit by the team members.

Anil K Saxena, Agarwal & Saxena

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Partner Pre Sign Off Checklist to include check for RFA (Red Flagged Accounts)

Obtain the list of RFA Accounts from the branch

RED FLAG has not been removed within 6 months, the same has been reported as a SUSPECTED FRAUD or FRAUD

Obtain the list of all accounts flagged as RFA by other banks but have not been flagged as RFA by the Bank ??

100% of such cases, ensure that the accounts are reviewed in line of a forensic audit to identify possible frauds / NPA

Anil K Saxena, Agarwal & Saxena

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Partner Pre Sign Off Checklist to include check for EWS (Early Warning Signals)

 Advances have been reviewed and mapped with the Early Warning Signals (EWS) as listed in Annexure II of the Master Direction on Frauds (July 01, 2016 ..Updated as on July 03, 2017)

 Tabulate and report in the LFAR unless the EWS are material and the account needs to be reported as FRAUD BY US AS AUDITORS  Also refer to “Early Signals of Fraud in Banking Sector” (Revised 2018 edition) issued by ICAI Detailed discussion on EWS in Chapter “Advances – Provisioning Norms” Anil K Saxena, Agarwal & Saxena

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Partner Pre Sign Off Checklist to include check for CFR (Central Fraud Registry)

Has the branch used CFR for Credit appraisal in respect of granting new facilities or renewal of facilities (Part of SCA certificate wrt RFA to RBI)

For all borrowers with limits of Rs 100 lacs and above, take screen shots/ proof by visiting the CFR portal and documenting the same

Anil K Saxena, Agarwal & Saxena

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Partner Pre Sign Off Checklist to include check for CERSAI

Map all NPAs where Collaterals have been taken as Security with the CERSAI portal to ensure existence of the same as on date of audit

Take print outs of the same as proof and document the same

Anil K Saxena, Agarwal & Saxena

CERSAI is applicable to both moveable and immoveable properties

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Partner Pre Sign Off Checklist to include check for LEI (Legal Entity Identifier)

Ensure that all borrowers with limits of Rs 100 crore and above have been registered as a LEI (Legal Entity Identifier) in terms of the RBI guidelines as at 31.03.2022

Anil K Saxena, Agarwal & Saxena

If not, list all such entities for LFAR reporting and also in case the same has expired and is pending renewal as at 31.03.2022

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Partner Pre Sign Off Checklist to include check for Exception Reports

Review Exception reports as at the year end and a few days earlier t0o Rule out any irregularity which requires adjustment in the financial statements by way of an MOC Anil K Saxena, Agarwal & Saxena

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Partner Pre Sign Off Checklist to include check for CRILC Reports

Review selected stressed accounts and seek the CRILC report as on date for possible SMA-0, SMA-01, and SMA-02 classification for further review and possible MOC/ NPA classification.

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RBI Regulations!! www.rbi.org.in

Members to refer to extant:

•RBI Master Circulars •RBI Master Directions •Circulars •Press Releases • FAQs wherever they wish to seek further clarifications on any matter/subject.

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Important Master Circulars still valid Master circular on Basel III Capital Regulations (Also refer to 14.1.16, 1.3.16 and 1.2.17)

July 1, 2015

Master circular on Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

July 1, 2015

Master circular on Loans & Advances – Statutory and other restrictions

July 1, 2015

Master circular on Wilful Defaulters

July 1, 2015

Master circular on Para Banking Activities

July 1, 2015

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Important Master Circulars issued during the year Master circular on Housing Finance

February 18, 2022

Master circular on Guarantees and Co-acceptances

November 9, 2021

Master circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances

Anil K Saxena, Agarwal & Saxena

October 1, 2021

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Master Directions which override MC’s RBI website (www.rbi.org.in) Master Direction – Know Your Customer (KYC) Direction

Master Directions on Frauds – Classification and Reporting by commercial banks and select FIs

February 25, 2016 (Updated as of January 09, 2020 July 1, 2016 (Updated July 03, 2017)

Master Direction – Regional Rural Banks - Priority Sector July 7, 2016 Lending – Targets and classification (Updated as of September 04, 2020) Master Direction – Reserve Bank of India (Relief Measures by Banks in areas affected by natural calamities)

July 7, 2016

Master Direction on Lending to MSME Sector

July 24, 2017

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Master Directions which override MC’s RBI website (www.rbi.org.in)

Master Direction – Reserve Bank (Interest rates on Advances) 2016

March 03, 2016

Master Direction on RBI (Interest rate on Deposits) Directions, 2016

March 03, 2016

Master Direction on Lending to MSME Sector Master Direction on Financial Statements - Presentation and Disclosures

Anil K Saxena, Agarwal & Saxena

July 24, 2017 August 30, 2021

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Other Important RBI Guidance FAQs on MSME

Updated as on October 1, 2021

FAQs on Priority Sector Lending – Targets and Classification (Master Direction updated on September 4, 2020)

Updated as on December 28, 2018

Index on Circulars available on RBI website and Guidance Note on Bank Audit 2022 – download and tabulate for reference and record

Anil K Saxena, Agarwal & Saxena

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Things you need to carry to the branch….

Branch Audit Programme

Other Audit Aids (Letter heads/ Stamps/Digital Signatures etc.

Bank’s Closing Circular/ instructions

RBI Master circular / Master Directions/ PR/ FAQ/ etc

RBI Circulars issued during the year

CBS Codes & Utility reports Anil K Saxena, Agarwal & Saxena

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Reporting - Audit of IFC Vs LFAR Vs FS

Matters reported in LFAR (Transactional or Process Audit) or IFCoFR (Control testing) or Audit Report on FS

Issues in either of the three reports cannot be overlooked while issuing the other Reports.

Anil K Saxena, Agarwal & Saxena

Need to ensure synchronisation to avoid contradictions amongst the 3 reports.

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Guidance Note on Audit of Banks 2022 dated 10th February 2022 issued by ICAI • Section A – SCAs • Section B – Bank Branch Audit Anil K Saxena, Agarwal & Saxena

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LET’s GET ROLLING! Particulars Introduction Planning and Preparation

Regulatory Changes during the year

Anil K Saxena, Agarwal & Saxena

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Important RBI Circulars issued by RBI in FY 2021-22 Asset Classification and Income Recognition following the expiry of Covid-19 April 7, 2021 regulatory package (RBI/2021-22/17 DOR.STR.REC.4/21.04.048/2021-22) Resolution Framework 2.0 – Resolution of Covid-19 related stress of Micro, Small and Medium Enterprises (MSMEs) (RBI/2021-22/32 DOR.STR.REC.12/21.04.048/2021-22)

May 5, 2021

Resolution Framework – 2.0: Resolution of Covid-19 related stress of Individuals and Small Businesses (RBI/2021-22/31 DOR.STR.REC.11/21.04.048/2021-22)

May 5, 2021

Resolution Framework – 2.0: Resolution of Covid-19 related stress of Individuals and Small Businesses (RBI/2021-22/28 DOR.STR.REC.10/21.04.048/2021-22)

May 5, 2021

New Definition of Micro, Small and Medium Enterprises (RBI/2021-22/63 June 25, 2021 FIDD.MSME & NFS.BC.No.12/06.02.31/2021-22) Anil K Saxena, Agarwal & Saxena

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Important RBI Circulars issued by RBI in FY 2021-22 Resolution Framework - 2.0: Resolution of Covid-19 related stress of Micro, June 4, 2021 Small and Medium Enterprises (MSMEs) – Revision in the threshold for aggregate exposure Asset Classification and Income Recognition following the expiry of Covid-19 regulatory package (RBI/2021-22/47 DOR.STR.REC.21/21.04.048/2021-22) Resolution Framework - 2.0: Resolution of Covid-19 related stress of June 4, 2021 Individuals and Small Businesses – Revision in the threshold for aggregate exposure (RBI/2021-22/46 DOR.STR.REC.12/21.04.048/2021-22) Loans and Advances – Regulatory DOR.CRE.REC.No.33/13.03.00/2021-22)

Restrictions

(RBI/2021-22/72 July 23, 2021

New Definition of Micro, Small and Medium Enterprises - Addition of Retail and Wholesale Trade (RBI/2021-22/67 FIDD.MSME & NFS.BC.No.13/06.02.31/2021-22) Anil K Saxena, Agarwal & Saxena

July 7, 2021

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Important RBI Circulars issued by RBI in FY 2021-22 Guidelines for Implementation of the circular on Opening of Current Accounts by Banks (RBI/2021-22/77 DOR.CRE.REC.35/21.04.048/2021-22)

August 4, 2021

Prudential Norms for Off-Balance Sheet Exposures of Banks – Restructuring of derivative contracts (RBI/2021-22/81 DOR.MRG.39/21.04.157/2021-22)

August 6, 2021

Resolution Framework for COVID-19-related Stress – Financial Parameters – Revised timelines for compliance (RBI/2021-22/80 DOR.STR.REC.38/21.04.048/202122)

August 6, 2021

Master Direction on Financial Statements - Presentation and Disclosures

August 30, 2021

Master Circular - Prudential norms on Income Recognition, Asset Classification and October 1, 2021 Provisioning pertaining to Advances (RBI/2021-22/104 DOR.No.STR.REC.55/ 21.04.048/2021-22)

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Important RBI Circulars issued by RBI in FY 2021-22 Opening of Current Accounts by Banks – Need for Discipline (RBI/2021-22/116 October 29, 2021 DOR.CRE.REC.63/21.04.048/2021-22) Master Circular Guarantees DOR.STR.REC.66/13.07.010/2021-22)

and

Co-acceptances

(RBI/2021-22/121

November 9, 2021

Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Clarifications (RBI/2021-22/125 DOR.STR.REC.68/21.04.048/2021-22)

November 12, 2021

Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Clarifications (RBI/2021-22/158 DOR.STR.REC.85/21.04.048/2021-22)

February 15, 2022

Master Circular – Housing Finance (RBI/2021-22/171 DOR.CRE.REC.No.87/08.12.001/202122)

February 18, 2022

New Definition of Micro, Small and Medium Enterprises – Clarification (RBI/2021-22/161 FIDD.MSME & NFS.BC.No.16/06.02.31/2021-22)

February 18, 2022

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1. Asset Classification and Income Recognition following the expiry of Covid-19 regulatory package RBI Circular of April 07, 2021

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Post Covid IRAC – RBI Circular of 07th April 2021 Hon’ble SC Ruling of 23rd March 21 - Small Scale Industrial Manufacturers Association vs UOI & Ors. RBI Circular of 07th April 2021

There shall be no charging of compound interest, interest on interest, or penal interest with respect to installments that had not been paid by borrowers after availing the loan moratorium scheme extended by the Reserve Bank of India (RBI) from 01 March 2020 to 31 August 2020 on account of the COVID-19 pandemic.

1.

Put in place a Board-approved policy to refund/ adjust the ‘interest on interest’ charged to the borrowers during the moratorium period, i.e. March 1, 2020 to August 31, 2020 in conformity with the above judgement 2. Reliefs shall be applicable to all borrowers, including those who had availed of working capital facilities during the moratorium period, irrespective of whether moratorium had been fully or partially availed, or not availed 3. Disclose the aggregate amount to be refunded/adjusted in respect of their borrowers based on the above reliefs in their financial statements for the year ending March 31, 2021 Anil K Saxena, Agarwal & Saxena

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Post Covid IRAC – RBI Circular of 07th April 2021 II. Asset Classification

Accounts that were not granted any moratorium in terms of the Covid19 Regulatory Package As per the criteria laid out in the Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated July 1, 2015

Accounts that were granted moratorium in terms of the Covid19 Regulatory Package

Period March 1, 2020 to August 31, 2020

In terms of the circular DOR.No.BP.BC.63/21.04.048/2019-20 dated April 17, 2020, read with circular DOR.No.BP.BC.71/21.04.048/2019-20 dated May 23, 2020 Anil K Saxena, Agarwal & Saxena

Period Commencing September 1, 2020

Applicable IRAC Norms 41

2. Resolution Framework 2.0 – Resolution of Covid – 19 related stress of Micro, Small and Medium Enterprises (MSMEs) RBI Circular of May 05, 2021

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Classification of MSME : Gazette Notification S.O. 2119 (E) dated June 26, 2020 MICRO Investment in Plant <= & Machinery

Rs. 1 Crore Rs. 25/ 10 Lacs

SMALL

Rs. 10 Crores Rs. 5/ 2Crores

MEDIUM

Rs. 50 Crores Rs. 10/ 5 Crores

& Turnover

<=

Rs. 5 Crores

Rs. 50 Crores

Anil K Saxena, Agarwal & Saxena

Rs. 250 Crores

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MSME Sector : Restructuring of Advances – Benefits Extended - 05 May 2021 Facility for restructuring existing loans without a downgrade in the asset classification subject to : (Extension of the facility provided by RBI Circular of 06.08.2020)

1

Aggregate Exposure (FB + NFB)

2

Borrower’s Account was a “Standard Assets” as on March 31, 2021

3

<=

Rs. 25 Crores as on March 1, 2020 changed to 50

Crores in terms of RBI Circular of June 4, 2021

The borrower should be classified as a micro, small or medium enterprise as on March 31, 2021 in terms of the Gazette Notification S.O. 2119 (E) dated June 26, 2020 (Refer to earlier slide) Anil K Saxena, Agarwal & Saxena

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MSME Sector : Restructuring of Advances – Benefits Extended - 05 May 2021 Facility for restructuring existing loans without a downgrade in the asset classification subject to : (Extension of the facility provided by RBI Circular of 06.08.2020)

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Borrower is GST Registered provided they are not exempt (As per Exemption limit as on March 31, 2020)

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The borrower’s account was not restructured in terms of the circulars DOR.No.BP.BC/4/21.04.048/2020-21 dated August 6, 2020; DOR.No.BP.BC.34/21.04.048/2019-20 dated February 11, 2020; or DBR.No.BP.BC.18/21.04.048/2018-19 dated January 1, 2019 (collectively referred to as MSME restructuring circulars).

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The restructuring of the borrower account is invoked by September 30, 2021 Anil K Saxena, Agarwal & Saxena

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MSME Sector : Restructuring of Advances – Benefits Extended - 05 May 2021 Facility for restructuring existing loans without a downgrade in the asset classification subject to : (Extension of the facility provided by RBI Circular of 06.08.2020)

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The restructuring of the borrower account is implemented within 90 days from the date of invocation.

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If the borrower is not registered in the Udyam Registration portal, such registration shall be required to be completed before the date of implementation of the restructuring plan for the plan to be treated as implemented https://udyamregistration.gov.in

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Upon implementation of the restructuring plan, the lending institutions shall keep provision of 10 % of the residual debt of the borrower.

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3. New Definition of Micro, Small and Medium Enterprises RBI Circular of June 25, 2021 “The existing Entrepreneurs Memorandum (EM) Part II and Udyog Aadhaar Memorandum (UAMs) of the MSMEs obtained till June 30, 2020 shall remain valid till December 31, 2021”.

UAM (replaced EM II) and filing of UAM is optional for MSMEs and compulsory for Medium Enterprises. Same was valid till 31/12/2021

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4. New Definition of Micro, Small and Medium Enterprises - Addition of Retail and Wholesale Trade RBI Circular of July 7, 2021

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New Definition of Micro, Small and Medium Enterprises - Addition of Retail and Wholesale Trade - RBI Circular of July 7, 2021

Ministry of Micro, Small and Medium Enterprises vide Office Memorandum (OM) No. 5/2(2)/2021-E/P & G/Policy dated July 2, 2021, has decided to include Retail and Wholesale trade as MSMEs for the limited purpose of Priority Sector Lending and they would be allowed to be registered on Udyam Registration Portal for the following NIC Codes and activities mentioned against them: 45 46

Wholesale and retail trade and repair of motor vehicles and motorcycles Wholesale trade except of motor vehicles and motorcycles

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Retail trade except of motor vehicles and motorcycles Anil K Saxena, Agarwal & Saxena

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5. Resolution Framework - 2.0 : Resolution of Covid-19 related stress of Individuals and Small Businesses RBI Circular of May 05, 2021

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Resolution Framework of Covid 19 Related Stress 2.0 : RBI Circular of May 05, 2021 - Applicability

 All Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks)  All Primary (Urban) Co-operative Banks/State Co-operative Banks/ District Central Co-operative Banks  All All-India Financial Institutions

 All Non-Banking Financial Companies (including Housing Finance Companies) Anil K Saxena, Agarwal & Saxena

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Resolution Framework of Covid 19 Related Stress 2.0 : RBI Circular of May 05, 2021 PART A

Resolution of advances to individuals and small businesses

PART B

Working capital support for small businesses where resolution plans were implemented previously

PART C

Disclosures and Credit Reporting

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Resolution Framework of Covid 19 Related Stress 2.0 : Individuals and Small Business RBI Circular of May 05, 2021 - Applicability

 Individuals who have availed of personal loans  Individuals who have availed of loans and advances for business purposes and to whom the lending institutions have aggregate exposure of not more than Rs.25 crore as on March 31, 2021.  Small businesses, including those engaged in retail and wholesale trade, other than those classified as MSME as on March 31, 2021, and to whom the lending institutions have aggregate exposure of not more than Rs.25 crore as on March 31, 2021.

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Resolution Framework of Covid 19 Related Stress 2.0 : Individuals and Small Business RBI Circular of May 05, 2021 - Applicability

 Provided resolution as per framework 1.0 should not have been availed and  Exposure should be Standard as on March 31, 2021. (If downgraded to NPA subsequent to invocation, same to be upgraded on implementation)  Invocation of resolution last date : September 30, 2021  Implementation : 90 days from invocation Anil K Saxena, Agarwal & Saxena

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Resolution Framework of Covid 19 Related Stress 2.0 : May 05, 2021 WC Support for Small Businesses where RP were implemented previously - Applicability

If RP had been implemented in terms of Resolution Framework 1.0 in respect of following:  Individuals who have availed of loans and advances for business purposes and to whom the lending institutions have aggregate exposure of not more than Rs.25 crore as on March 31, 2021.  Small businesses, including those engaged in retail and wholesale trade, other than those classified as MSME as on March 31, 2021, and to whom the lending institutions have aggregate exposure of not more than Rs.25 crore as on March 31, 2021.

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Resolution Framework of Covid 19 Related Stress 2.0 : May 05, 2021 WC Support for Small Businesses where RP were implemented previously – T&C

WC sanctioned may be reviewed by banks as a “one time measure” :  WC sanctioned limits/ DP on reassessment of WC cycle  Reduction of margins etc Above not to be treated as RESTRUCTURING Decision to be taken by banks in respect of the above by September 30, 2021 Margins, WC limits etc to be restored to earlier level by March 31, 2022.

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Disclosures and Credit Reporting : Quarters ending September 30, 2021 and December 31, 2021 - May require to be certified at Branch level Sl. No.

Description

Individual Borrowers Personal Loans

(A)

Number of requests received for invoking resolution process under Part A

(B)

Number of accounts where resolution plan has been implemented under this window

(C)

Exposure to accounts mentioned at implementation of the plan

(D)

Of (C), aggregate amount of debt that was converted into other securities

(E)

Additional funding sanctioned, if any, including between invocation of the plan and implementation

(F)

Increase in provisions on account of the implementation of the resolution plan

Business Loans

Small Businesses

(B) before

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6. Loans and Advances – Regulatory Restrictions RBI Circular of July 23, 2021

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Loans and Advances – Regulatory Restrictions RBI Circular of July 23, 2021 Para 2.2.1.2 : Unless sanctioned by the Board of Directors/Management Committee, banks should not grant loans and advances aggregating Rupees twenty five lakhs Rupees five crores and above to – (a) directors (including the Chairman/Managing Director) of other banks*; (b) any firm in which any of the directors of other banks * is interested as a partner or guarantor; and (c) any company in which any of the directors of other banks * holds substantial interest or is interested as a director or as a guarantor.

Similar change in Para 2.2.1.4 and 2.2.1.5 – Rupees Twenty Five Lacs changed to Rs. five crores Anil K Saxena, Agarwal & Saxena

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7. Prudential Norms for Off-Balance Sheet Exposures of Banks – Restructuring of derivative contracts RBI Circular of August 06, 2021

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Prudential Norms for Off-Balance Sheet Exposures of Banks – Restructuring of derivative contracts - RBI Circular of August 06, 2021 In terms of para 2.2 of circular DBOD.No.BP.BC.57/21.04.157/2008-09 dated October 13, 2008 - change in any of the parameters of the original derivative contract would be treated as a restructuring

Clarification in terms of the Circular

Change in the terms of a derivative contract on account of change in reference rate necessitated due to transition from LIBOR to an alternative reference rate shall not be treated as restructuring of the derivative contract provided all other parameters of the original contract remain unchanged Anil K Saxena, Agarwal & Saxena

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8. Resolution Framework for COVID-19-related Stress – Financial Parameters – Revised timelines for compliance RBI Circular of August 06, 2021

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Deferment of Target Dates to achieve Key Ratios Average Debt Service Coverage Ratio (ADSCR) (1.2 & above) Current Ratio (1 & above)

Debt Service Coverage Ratio (DSCR) (1 & above) Total Debt / EBITDA (Sector Specific thresholds)

Target Dates deferred up to 01.10.2022 Total Outside Liabilities/ Adjusted Tangible Net Worth (TOL/ ATNW) (Sector-Specific thresholds) Anil K Saxena, Agarwal & Saxena

Shall remain unchanged as March 31, 2022 63

9. Guidelines for Implementation of the circular on Opening of Current Accounts by Banks RBI Circular of August 04, 2021

& 10. Opening of Current Accounts by Banks - Need for Discipline RBI Circular of October 29, 2021 Anil K Saxena, Agarwal & Saxena

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RBI Circular of August 06, 2020, November 02, 2020 & December 14, 2020 (1 of 2) Does the borrower have a CC/ OD facility

YES

Any bank can open a Current A/c (Sub to undertaking)

No Bank can open a Current A/c

NO

Less than 5 Crores

Aggregate amt of credit facilities (Other than CC/OD) availed by the borrower

>=5 Crores < 50 Crores

>= 50 Crores 1.

2.

3.

4.

Suitable mandatory escrow mechanism will be required Only the escrow managing bank/ agent will open current a/c Other lenders can open collection accounts ONLY Non – lending banks shall not open any current accounts Anil K Saxena, Agarwal & Saxena

1.

Any lender can open a Current account 2. Non-lenders can open only Collection accounts – debits allowed only to Escrow account with the lending bank 65

RBI Circular of August 06, 2020, November 02, 2020 & December 14, 2020 (2 of 2) Whether debits in CC/ OD accounts is allowed in Banks with aggregate exposure of less than 10% ?

Is bank’s exposure to the borrower 10% or more of aggregate exposure

YES

CC/ OD facility can be availed, as hitherto

NO

CC/ OD facility can be availed. However, it can be used only for credits in the account. The debits can be only to remit the funds to the CC/ OD account of that borrower with a bank that has 10 per cent or more of the exposure of the banking system to that borrower Anil K Saxena, Agarwal & Saxena

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Changes/ Clarifications Guidelines for Implementation of the circular on Opening of Current Accounts by Banks - RBI Circular of August 04, 2021

Banks were permitted time till October 31, 2021 to implement the provisions of the circular.

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Opening of Current Accounts by Banks - Need for Discipline – RBI Cir of 29.10.2021 – Relaxation of earlier regulations 1.

For borrowers, where the exposure of the banking system is less than ₹5 crore, there is no restriction on opening of current accounts or on provision of CC/OD facility by banks, subject to obtaining an undertaking from such borrowers that they shall inform the bank(s), as and when the credit facilities availed by them from the banking system reaches ₹5 crore or more.

2.

In respect of borrowers where exposure of the banking system is ₹5 crore or more, such borrower can maintain current accounts with any one of the banks with which it has CC/OD facility, provided that the bank has at least 10 per cent of the exposure of the banking system to that borrower.

Further, other lending banks may open only collection accounts subject to the condition that funds deposited in such collection accounts will be remitted within two working days of receiving such funds, to the CC/OD account maintained with the above-mentioned bank maintaining current accounts for the borrower. In case none of the lenders has at least 10% exposure of the banking system to the borrower, the bank having the highest exposure may open current accounts. Nonlending banks are not permitted to open current accounts.

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Opening of Current Accounts by Banks - Need for Discipline – RBI Cir of 29.10.2021 – Relaxation of earlier regulations

3. Borrowers not availing CC/OD facility from the banking system shall continue to maintain current accounts.

4. Banks maintaining collection accounts are permitted to debit fee/charges from such accounts before transferring the funds to the escrow account/CC/OD account of the borrower.

5. Banks to monitor all accounts regularly, at least on a halfyearly basis Anil K Saxena, Agarwal & Saxena

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RBI Master Circular of 01st October 2021 Demonetisation of SBNs on 08th November 2016

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Major Inclusions – Para 5.7.2 – New Guidelines for Provisioning Provisioning rates prescribed are the regulatory minimum and banks are encouraged to make provisions at higher rates in respect of advances to stressed sectors of the economy.

In this regard, it is advised as under: (i) Board–approved policy for making provisions for standard assets at rates higher than the regulatory minimum, based on evaluation of risk and stress in various sectors. (ii) Policy review, at least on a quarterly basis, of the performance of various sectors to which the bank has an exposure to evaluate the present and emerging risks and stress therein. (iii) Review may include debt-equity ratio, interest coverage ratio, profit margins, ratings upgrade to downgrade ratio, sectoral non-performing assets/stressed assets, industry performance and outlook, legal/ regulatory issues faced by the sector, etc. (iv) The reviews may also include sector specific parameters.

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Major Inclusions – Para 8.1 & 8.2 Lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA) as per the following categories: SMA Sub-categories SMA-0 SMA-1 SMA-2

Basis for classification – Principal or interest payment or any other amount wholly or partly overdue between 1-30 days 31-60 days 61-90 days

In the case of revolving credit facilities like cash credit, the SMA subcategories will be as follows: SMA Sub-categories SMA-1 SMA-2

Basis for classification – Outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of: 31-60 days 61-90 days Anil K Saxena, Agarwal & Saxena

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IRAC Norms – Clarifications – Nov 12, 2021 The basis for classification of SMA Categories shall be as follows : Loans other than revolving facilities SMA Subcategories

Basis for classification – Principal or interest payment or any other amount wholly or partly overdue

Loans in the nature of revolving facilities like cash credit/overdraft SMA Subcategories

Basis for classification – Outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of:

SMA – 0

Upto 30 days

-

-

SMA – 1

More than 30 days and upto 60 days

SMA – 1

More than 30 days and upto 60 days

SMA – 2

More than 60 days and upto 90 days

SMA – 2

More than 60 days and upto 90 days

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Major Changes – Para 4.2.21 ii 2015

2021

A credit card account will be treated as A credit card account will be treated as non-performing asset if the “minimum non-performing asset if the “minimum amount due”, as mentioned in the amount due”, as mentioned in the statement, is not paid fully within 90 days statement, is not paid fully within 90 from the next statement date. The gap days from the payment due date between two statements should not be mentioned in the statement. more than a month

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IRAC Norms – Clarifications – Nov 12, 2021 Borrower accounts shall be flagged as overdue by the lending institutions as part of their day-end processes for the due date, irrespective of the time of running such processes.

Classification of borrower accounts as SMA as well as NPA shall be done as part of day-end process for the relevant date and the SMA or NPA classification date shall be the calendar date for which the day end process is run.

The date of SMA/NPA shall reflect the asset classification status of an account at the day-end of that calendar date Anil K Saxena, Agarwal & Saxena

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IRAC Norms – Clarifications – Nov 12, 2021 Clarification regarding definition of ‘out of order’ It is clarified that an account shall be treated as ‘out of order’ if: i. the outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days, OR ii. the outstanding balance in the principal operating account CC/OD 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 iii. the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power or but credits are not enough to cover the interest debited during the same period previous 90 days period.

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IRAC Norms – Clarifications – Nov 12, 2021 NPA classification in case of interest payments Paragraph 2.1.3 of the MC dated October 1, 2021:

an account is classified 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.

Above instructions modified as under: In case of interest payments in respect of term loans, an account will be classified as NPA if the interest applied at specified rests remains overdue for more than 90 days.

These instructions shall be effective from March 31, 2022. Accordingly, in respect of any borrower account which becomes overdue on or after March 31, 2022, its classification as NPA shall be based on the account being overdue for more than 90 days.

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IRAC Norms – Clarifications – Nov 12, 2021 Upgradation of accounts classified as NPAs

It is clarified that loan accounts classified as NPAs may be upgraded as ‘standard’ asset

only if entire arrears of interest and principal are paid by the borrower

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IRAC Norms – Clarifications – Nov 12, 2021 Income recognition policy for loans with moratorium on payment of interest

In cases of loans where moratorium has been granted for repayment of interest, lending institutions may recognize interest income on accrual basis for accounts which continue to be classified as ‘standard’.

It is clarified that if loans with moratorium on payment of interest (permitted at the time of sanction of the loan) become NPA after the moratorium period is over, the capitalized interest corresponding to the interest accrued during such moratorium period need not be reversed.

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IRAC Norms – Clarifications – February 15, 2022 i.

The definition of ‘out of order’, as clarified in the Circular, shall be applicable to all loan products being offered as an overdraft facility, including those not meant for business purposes and/ or which entail interest repayments as the only credits.

ii. The ‘previous 90 days period’ for determination of ‘out of order’ status of a CC/OD account shall be inclusive of the day for which the day-end process is being run. iii. In case of borrowers having more than one credit facility from a lending institution, loan accounts shall be upgraded from NPA to standard asset category only upon repayment of entire arrears of interest and principal pertaining to all the credit facilities.

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Contact +91-9839112626 anilk.saxena@agasax.com @aks_iamhuman www.linkedin.com/anil-k-saxena3240b3b2 https://www.facebook.com/anilk.sa xena.986

CA Anil K. Saxena Senior Partner, Agarwal & Saxena B.Sc, FCA, DISA (ICAI)

Author of ‘A Practical Guide For Bank Auditors’ Published by Taxmann (5th edition – 2020) Anil K Saxena, Agarwal & Saxena

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