RBI to banks: Implement revised LFAR norms to improve audit efficiency, risk management

The Reserve Bank of India has asked Banks to put into operation revised Long Format Audit Report (LFAR) formats, whereby Statutory Central Auditors (SCAs) will be required to comment on adverse features considered significant in top 50 standard large advances and the accounts which need management’s attention, among others, for the period covering FY 2020-21 and onwards.

The LFAR will cover areas such as credit risk; market risk; operational risk; capital adequacy; going concern and liquidity risk assessment; information systems; among others.

The SCAs, through LFAR, should examine and comment upon recovery from all the written-off accounts during the financial year; and the system of identifying and reporting of the wilful defaulter.

The RBI said an examination of inactive/ inoperative accounts might also be carried out, as it is a fraud-prone area.

Identify gaps

The central bank observed that the overall objective of LFAR by SCAs should be to identify and assess the gaps and vulnerable areas in the business operations, risk management, compliance and the efficacy of internal audit and provide an independent opinion on the same to the Board of the bank and provide their observations.

The RBI said this may also involve commenting on various risks to which the banks are exposed to like credit, market, operational and liquidity risk and risk management efficacy, assessment of the appropriateness of procedures for preparation of supervisory returns.

Besides, through LFAR, SCAs can give an opinion on KYC (Know Your Customer)/AML (Anti-Money Laundering)/CFT (Countering of Financing of Terrorism) issues, cybersecurity, business performance, business strategy including very high growth / high ROE (return on equity) accompanied with high risks, etc.

Credit risk areas

The SCAs observations in LFAR should broadly cover the sufficiency and effectiveness of the loan policy along with the compliance to instructions issued by RBI in areas like exposure norms, interest rates, statutory and other restrictions, among others.

SCAs should declare whether the credit assessment process is sufficiently placed to capture the risk as also the adequacy of information/data available with the bank. They should closely examine quick mortality cases.

The Auditors should examine the policy relating to delegation of powers at various levels, appropriateness of checks and balances, adherence to authorised limits, disbursal after complying with terms and conditions of disbursal.

The central bank said the entire process, including the system of ensuring execution as per the terms of sanction, the structure of documentation in respect of joint/consortium advances, availability of relevant documents to ensure the creation of charge in favour of banks when required, renewal of documents, should be examined.

Red Flagged Accounts

SCAs should pay special attention to the functioning and effectiveness of the system of identifying and reporting of Red Flagged Accounts, Early-Warning System (EWS), receipt of periodic balance conformation/acknowledgement of debts, stock/book debt statements, balance-sheet, audited-accounts etc.

The Auditors will be required to comment on deviations observed in restructured accounts/stressed accounts under resolution about Internal/RBI guidelines.

The SCAs should be given special emphasis on the stance of the bank concerning the resolution of stressed accounts, primarily covering compliance to regulatory guidelines, formulation of board-approved policies including timelines for resolution, how decisions are taken during the review period, board-approved policies regarding recovery, compromise settlements, the exit of exposure through sale of stressed assets, among others.

The Auditors should examine and comment on the effectiveness of the system for compiling data relating to NPA and their provision, data integrity, the system of suspension of charging of interest and adherence thereto. Deviations observed, if any, should be provided along with requisite examples.

The RBI said SCAs should specifically comment on instances observed/reported wherein the instructions of controlling authority related to legal action for recovery or recalling of advances is not acted upon, the system of compromise settlements, the system of monitoring accounts under Insolvency and Bankruptcy Code 2016 (IBC), write-off.

Frauds/Vigilance

SCAs are required to examine and comment on the appropriateness of fraud risk management system and processes for early detection, timely reporting to RBI, investigation of frauds as also adequacy of provisioning for reported frauds and deviations observed in compliance with directives issued by RBI.

The RBI wants the Auditors to examine and specifically comment on the system of clearance of items debited/credited to suspense/sundry accounts with the focus on audit trail, along with age-wise analysis of un-cleared entries of suspense account, sundry deposit, etc. as on balance sheet date along with subsequent clearance, thereof, if any.

Any unusual entries observed in a suspense account, sundry deposit etc. should be specifically commented. It should also be examined, whether the bank has made adequate provision to un-cleared entries in a suspense account, sundry deposits, etc. as per the RBI guidelines and to the satisfaction of the auditor.

COMMENT NOW