Introduction of Half-yearly Review of Accounts of Public Sector Banks

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પ્રકાશિત તારીખ મે 17, 2001

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Introduction of Half-yearly Review of Accounts of Public Sector Banks

Also Refer
DBS.ARS.No.BC.13/08.91.001/2000-01

May 17, 2001

The Chairmen & Managing Directors of all Public Sector Banks
Dear Sirs,

Introduction of Half-yearly Review of Accounts of Public Sector Banks

We advise that the matter of introducing half-yearly review of accounts of public sector banks for ensuring better compliance and transparency has been engaging the attention of the Reserve Bank of India (RBI) for quite some time. In this direction, RBI constituted a Working Group to examine the feasibility/modalities of introducing half-yearly review of accounts of public sector banks comprising representatives from a few public sector banks, Institute of Chartered Accountants of India (ICAI) and its own representative. The Working Group submitted its report in June 2000 and it was circulated among all the public sector banks for soliciting their views/suggestions in the matter. Most of the banks were in favour of introducing the half-yearly review of accounts irrespective of whether or not their shares are listed on Stock Exchange/s as the proposed system would provide some credibility to the half yearly results prepared by them.

Keeping in view the recommendations of the Working Group as well as the views/suggestions received from the public sector banks in this regard and the fact that the introduction of the system of half-yearly review will be a healthy practice for the banking system, it has been decided to put in place the system of half-yearly review of accounts of all public sector banks with effect from the half-year ending 30 September 2001. Such half-yearly review will be carried out by the team of Statutory Central Auditors (SCAs) of the bank and the said team will be required to submit the financial results in regard to the bank's operations together with its half-yearly review report in the proformas set out in Annexures I* and II** respectively, finalised in consultation with the Securities and Exchange Board of India (SEBI). As the Annexure I* is for quarterly financial results also, the public sector banks, whose shares have not so far been listed on the stock exchange/s, may have to use this format as well as that set out in Annexure II** only once i.e. for the half-yearly results for the period ending 30 September every year.
Further, we advise that while undertaking the exercise, major thrust by the concerned team of SCAs will be on verification of income and expenditure items and not on balance sheet items except to the extent that such items have an impact on the income and expenditure of the bank. While the auditors would examine the compliance of the provisioning norms for NPAs as on 30 September every year, the verification of documents and security with the bank may not be generally necessary. As regards investments, though the SCAs will check the accrued interest thereon and the mode of valuation thereof, physical verification of investments may not generally be done unless the SCAs find it necessary in certain cases. The items to be covered under the half-yearly review, the relative guidelines therefor and other allied matters are indicated in Annexure III.
We have requested the ICAI to prepare necessary guidelines for the benefit of its members undertaking such half-yearly review in banks.
We advise that the public sector banks should ensure that the half-yearly review reports as indicated in Annexures I and II above are submitted to the Department of Banking Supervision, Central Office, Mumbai and to the concerned Regional Office of this Department immediately on receipt thereof from the team of SCAs.
We also enclose a copy of SEBI's circular No.SMDRP/Policy/Cir11/01 dated 15 February 2001 addressed to all the stock exchanges the contents of which are self-explanatory.
Please acknowledge receipt.

Yours faithfully, Sd/-

(A. R. Dalvi)

Chief General Manager

* Format not enclosed. Revised vide DBS.ARS.No.BC.17/08.91.001/2002-03 dt 05-06-03
** Format not enclosed. Revised vide DBS.ARS.No.BC.4/08.91.001/2001-02 dt 25-10-01

Annexure - III
List of items to be covered during the half-yearly review, guidelines therefore and other allied matters

I. Heads of Accounts
(i) Advances
For the purpose of half-yearly review of NPAs, atleast 50 per cent advances of the bank should be covered. During such review, Statutory Central Auditors (SCAs) would be required to examine as to whether norms on income recognition, asset classification and provisioning thereon issued by the Reserve Bank of India, from time to time, had been followed.
(ii) Provisions
NPAs Public sector banks would be required to make full provision for NPAs for the six months ending September 30 every year. Further, at the time of ascertaining the total NPAs, banks would keep in view the amount of NPAs as at the end of the previous year, change in the status of any account during the half-year for which review is undertaken and new accounts which had become NPAs.
For the purpose of NPAs review as on September 30, the SCAs of the bank will be required to carry out such review at those 20 branches which would have been otherwise selected by the SCAs during the statutory audit of the bank. The figures of NPAs as on September 30 at the branches subjected to the concurrent audit would be provided by the concerned concurrent auditors and such figures for the rest of the branches would be accepted as provided by the concerned branches. In the light of this, no separate NPAs review at the branch level by the statutory auditors would be necessary.
(iii) Expenditure
Provision in respect of the expenditure would be required to be made on actual basis. However, for heads of expenditure where the total amount is not material, provision can be made on an estimated basis.
(iv) Income
While making provision for income, it would not be necessary to have it on actual basis in all cases and the reasonable estimates made by the bank would be sufficient.
(v) Investments
All treasury operations (domestic and international), valuation of investments and provisions in regard to the depreciation thereon would have to be looked into by the SCAs. A physical verification of the investments may not generally be done unless the SCAs find it necessary in certain cases during the course of review exercise.
II. Team of Statutory Central Auditors for the purpose of half-yearly review
If RBI is able to finalise the panel of SCAs for public sector banks/all India Financial Institutions for the relevant financial year on or before 30 September every year, such half-yearly review should be carried out by the team of SCAs finalised/approved by RBI for that financial year. In case during any year it is not possible for RBI to finalise such a list by the end of September, the entire team of SCAs appointed for the previous financial year would carry out the half-yearly review.
III. Remuneration, etc. payable to SCAs
(a) (i) Nationalised banks and associate banks of SBI
25% of the fees prescribed by the RBI from time to time for (a) statutory audit of the Head/Central Office as an accounting unit and (b) fees for incorporation and scrutiny of returns of branches during the statutory central audit.
(ii) State Bank of India
25% of fees prescribed by the RBI from time to time for (a) statutory central audit of each Circle Office (b) fees for scrutiny and incorporation of returns of branches coming under the Circles and (c) fees for central office establishment.
(b) Branch Audit fees payable to SCAs who will be undertaking review at total 20 branches
25% of the remuneration prescribed by RBI from time to time for branch audit work of the bank (presently based on quantum of advances) excluding fees for LFAR, tax audit and certification work.
(c) Reimbursement of Traveling and Halting Allowances and daily conveyance charges This will be as prescribed by RBI for the statutory central audit work from time to time.
IV. Submission of review report by the SCAs
The team of SCAs would submit its report in the proformae set out in the Annexures I and II before 30 November every year i.e. within a period of two months after the conclusion of the half-year ending 30 September every year.