BANK AUDITING WITH REFERENCE TO STATE BANK OF INDIA

A Project Submitted to

University of Mumbai for partial completion of the degree of

M.Com Part-2 Sem-3 (Accountancy)

Under the Faculty of Commerce

By

Monika Shrinivas Gummula

Under the Guidance of

Mrs. Lipi Mukherjee

RAJASTHANI SAMMELAN’S
Ghanshyamdas Saraf College Of Arts & Commerce
REACCREDITED BY NAAC WITH ‘A’ GRADE
S.V. Road, Malad (west) Mumbai-400064

November 2017
BANK AUDITING WITH REFERENCE TO STATE BANK OF INDIA

A Project Submitted to

University of Mumbai for partial completion of the degree of

M.Com Part-2 Sem-3 (Accountancy)

Under the Faculty of Commerce

By

Monika Shrinivas Gummula

Under the Guidance of

Mrs. Lipi Mukherjee

RAJASTHANI SAMMELAN’S
Ghanshyamdas Saraf College Of Arts & Commerce
REACCREDITED BY NAAC WITH ‘A’ GRADE
S.V. Road, Malad (west) Mumbai-400064

November 2017
 RAJASTHANI SAMMELAN’S
Ghanshyamdas Saraf College Of Arts & Commerce
REACCREDITED BY NAAC WITH ‘A’ GRADE
S.V. Road, Malad (west) Mumbai-400064

Certificate

This is to certify that Ms Monika Shrinivas Gummula Roll No.28 has worked and
duly completed her project for the degree of Master in Commerce under the Faculty of
Commerce in the subject of Accountancy and her project is entitled, “Bank Auditing
With Reference to State Bank Of India” under my supervision. I further certify that
the entire work has been done by the learner under my guidance and that no part of it
has been submitted previously for any Degree or Diploma of any University.
It is her own work and facts reported by her personal findings and investigations.

Project Guide: Principal:

Date:

External Examiner: College Seal:

Date:
 Declaration by learner

I the undersigned Miss Monika Shrinivas Gummula here by, declare that the work
embodied in this project work titled “Bank Auditing With Reference to State Bank
Of India”, forms my own contribution to the research work carried out under the
guidance of Lipi Mukherjee is a result of my own research work and has not been
previously submitted to any other University for any other Degree/ Diploma to this or
any other University.
Whether reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.
I, here by further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

Name and Signature of the learner

Certified by
Name and Signature of the Guiding Teacher
 Acknowledgement

To list who all have helped me is difficult because they are so numerous and the depth
is so enormous.
I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me chance to do
this project.
I would like to thank my Principal, Mrs. Bhavana Vaidya for providing the necessary
facilities required for completion of this project.
I would also like to express my sincere gratitude towards my project guide Mrs. Lipi
Mukherjee whose guidance and care made the project successful.
I would also like to thank my College Library, for having provided various refernce
books related to my project.
Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my Parents and Peers who supported
me throughout my project.
 Summary

Banks occupy the pride of place in any financial system by virtue of the significant role they play in
spurring economic growth by undertaking maturity transformation and supporting the critical payment
systems. The specificity of banks, the volatility of financial markets, increased competition and
diversification, however, expose banks to risks and challenges.
Business of banking is susceptible to frauds. It is therefore necessary to have an internal control and
supervision mechanism for ensuring that no one person is in a position to violate procedures, rules,
regulations, guidelines, do an unauthorized act detrimental to the organization which remains
undetected for an indefinite period or long time. Therefore, inspection and audit plays crucial role in
success of banking operations.
This project is to view the task perform by an auditor while conducting the audit of bank deposit and
loans & advances. It explains the role played by different types of auditor, effect of Non-Performing
Asset on the asset of a bank. The auditor needs to be familiarizing with the direction of RBI affecting
the sanctioning and disbursement of advances. The auditor has to ensure that documents are executed
as per the terms of sanction. The auditor examine the procedure for review of advances laid down by
the authorities has been complied with or not. The auditing not only provide true and fair value but it
also helps us to financial position and internal control system of a bank.
 INDEX
Chapter No. Title of the Chapter Page No.

1. Introduction 1-4

2. Research Methodology 5-7

3. Bank Audit Process 8-39

4. Company Profile 40-44

5. Financial Ratios 45-48

6. Annual results 49-56

7. Bank Reports 57-76

8. Conclusion 77-78

 Bibliography
 Annexure :Questionnaire
Chapter 1

1
 INTRODUCTION
A well-organised and efficient banking system is a pre-requisite for economic growth. Banks play an
important role in the functioning of organised money markets. Presently, there are four types of
banking institutions in India. These are:
♦ Commercial banks
♦ Regional rural banks
♦ Co-operative banks
♦ Development banks (more commonly known as ‘term-lending institutions’)
Besides, the Reserve Bank of India (hereinafter referred to as RBI) acts as the central bank of the
country.
Commercial banks are by far the most widespread banking institutions in India. Typically, commercial
banks provide the following major products and services:
(a) Acceptance of Deposits;
(b) Granting of Advances
(c) Remittances;
(d) Collections;
(e) Cash Management Product;
(f) Issuance of Letters of Credit and Guarantees
(g) Merchant Banking Business;
(h) Credit Cards;
(i) Technology-based Services;
(j) Dividend / Interest / Refund Warrants;
(k) Safe-keeping Services;
(l) Lockers;
(m) Handling Government Business;
(n) Depository Participant (DP) Services;
(o) Automated Teller Machines (ATMs);
(p) Exchange of Notes,
(q) Debit Cards,
(r) Cross –selling,
(s) Auto Sweep facility in saving account,
(t) Third party advertisement on ATM network,
(u) Securitization of future lease rentals,
(v) Derivative business.
Commercial banks operating in India can be divided into two categories based on their ownership –
2
public sector banks and private sector banks. However, irrespective of the pattern of ownership, all
commercial banks in India function under the overall supervision and control of the RBI.
Public sector banks comprise the State Bank of India, its seven subsidiaries (also called
‘associate banks’ of State Bank of India; these are State Bank of Bikaner and Jaipur, State Bank of
Hyderabad, State Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of
Saurashtra, and State Bank of Travancore) and other nationalised banks.
The ownership of private sector banks is in private hands. They are of three types:
(a) Indian scheduled commercial banks other than public sector banks. (The term ‘scheduled
commercial banks’ refers to commercial banks which are included in the Second Schedule to the
Reserve Bank of India Act, 1934.) It may be noted that not all scheduled banks are commercial
banks; some co-operative banks are also scheduled banks. Commonly known as ‘banking
companies’, these banks are ‘companies’ registered under the Companies Act, 2013 or an earlier
Indian Companies Act.
(b) Non-scheduled banks.
(c) Indian branches of banks incorporated outside India, commonly referred to as ‘foreign banks’.
Regional Rural Banks have been established “with a view to developing the rural economy by
providing, for the purpose of development of agriculture, trade, commerce, industry and other
productive activities in the rural areas, credit and other facilities, particularly to the small and
marginal farmers, agricultural labourers and artisans and small entrepreneurs” (Preamble to the
Regional Rural Banks Act, 1976).
Co-operative Banks are banks in the co-operative sector which cater primarily to the credit needs of
the farming and allied sectors. Co-operative banks include central co-operative banks, state co-
operative banks, primary co-operative banks and land development banks.
Development Banks were started with the objective of providing only long-term finance for
development purposes; they are referred to as ‘development banks’ or ‘term-lending institutions’.
There are a number of all-India level term-lending institutions.
It is well known that Banking is such a unique industry that persons from all walks of involved with
Banks in any relation whether as an operational banker, trainer, auditor or even a support service
person such as a security printer and even a hardware and software supplier make Banking their only
sphere of activity for their full life in the constant endeavor to master in their for this Industry. In India
various types of audit are normally carried out in banking companies such audit are statutory audit,
revenue/income expenditure audit, concurrent audit, computer and system audit etc. the above audit is
mainly conducted by the banks own staff or external auditors. However, the rules and the regulation
relating to the conduct of various types of audit or inspection differ from a bank to bank except the
statutory audit for which the RBI guidelines is applicable for that.Today audit is form in the various
organizations it is basically form for investor because investor investing decision is depend on that
particular concept if auditor has expressing his view about particular organization is true and fair that
3
investor has get idea about how much should invest in particular securities or not. In public sector
banks multiple firms including central auditors and branch auditors generally conduct the audit. In
case of private sector banks and foreign banks, a single firm due to centralized database conducts the
audit. Consequently, the responsibilities of auditors in such banks are much wide.

4
Chapter 2

5
RESEARCH METHODOLOGY

Objective of the study :

 To study the bank auditing process.

 To study SBI bank audit procedure is carried out.
 To study the performance of SBI bank.
 To study how auditing helps in controlling the activities of banks.

Limitations :
 Limited information is provided of the company.
Scope :
 The data for this study including primary sources of data collection and secondary sources of
data collection have been collected around the analysis of bank auditing.
 This project begins with a brief explanation ofauditing of banks and process of auditing.These
kinds of data are generally related to secondary sources of data in which through books would be
collected.
Collection of Data :
The methods of data collection depend upon sources of data collection including primary source of
data and secondary source of data.
In this study both the set of methods of data collection have been utilized in the same emphasis and
they have created valuable ibformation to this research.

Primary Data
 Data was collected through questionnaire.
 The questionnaire covered all aspects of a bank audit :

• Sufficiency of information about audit focus, scope, stages, time frame;

• bank staff behavior and communication during the audit;

• clarity and conciseness

• reliability of information,

• reasonable and value of recommendations

• possibility for auditees to provide their comments

General evaluation and proposal

• value of the audit (added value, internal control enforcement, fraud detection, process &
procedure improvements, useful information), follow up importance);

• strengths and area for improvement

6
Secondary Data
 Collection of information from some sources including Internet (web sites) and different books.

7
Chapter 3

8
What is Bank Audit and its Process in India

‘Audit’ or ‘Auditing’ is an activity which is undertaken by any business organization on its own or by
the requirement under any law – to go through its accounts, transactions, and documents – to ensure
correctness, legality of it.

It is an examination of the accounts and can be conducted by internal or external agencies – known as
the auditors.

Bank Audit can be classified into 3 broad categories :-

 Concurrent Audit

 Internal Audit/ Information Systems Audit

 Statutory Audit

Concurrent Audit

 Concurrent Audit means – the audit or examination of transactions happening as and when a
transaction actually happens.

 It is a continuous audit, which goes on all the year around, usually conducted by external auditors
(Chartered Accountants) on monthly basis.

 In concurrent audits daily basis transactions are examined and checked – this ensures any
irregularities are nipped at the bud.

 Banks have a huge number of daily transactions – they also have many documentations and other
formalities that they have to conform too – through concurrent audit any irregularities or
nonconformities are easily found out as and when it happens and rectified immediately; this
avoids piling up of irregularities which may become a huge problem for any branch when the year
end audit comes around!

 Concurrent Auditors check for daily maximum cash balance adherence compliance, KYC norm
compliance, proper documentation of new loan disbursement, checking if new loans have been
made as per rules and regulations, income leakage etc. among other things like putting any new
RBI instruction to work!; these are reported on in the ‘concurrent audit report’.

 Concurrent Audit is a measure to help a Branch to work smoothly and rectify any mistakes to
avoid cascading effect of the irregularities.

 Concurrent Audit in one sentence will mean checking yesterdays transactions today.

9
Let us see the broad areas covered by the concurrent auditor:

A. Revenue Aspects:

1. Interest earned and service charges earned by the Bank

2. Interest Paid

3. All charges paid like cancellation charges, compensation under Court Directive etc.

B. Expenditure:

1. Salary payments

2.Branch expenses like printing and stationary, temporary employees etc.

3. Rent of premises etc.

C. Documentation and other aspects of advances department:

1. Documentation correctness of ALL new advances granted during the period

2. Validity of all old advances to ensure that they are not time barred.

3. Currency of insurance cover of stock machinery etc. 4. Whether the inspections of units and stock
have been carried out at the pre-set intervals.

D. Administrative and other aspects :

1. Correctness of attendance and leave records

2.Cash Department working including security aspects with periodic surprise inspection by the
auditor

3. Stock check at regular intervals of all security documents like Blank chequebooks, Demand Drafts,
Pay orders, Pass Books etc.

10
Internal/Information Systems Audit

 Many banks instead of having concurrent audit or even in addition to having concurrent audits
may use ‘internal auditing’.

 Internal Auditing is when any organization, including a bank, constitutes an audit team within its
own organization to cater to its auditing requirements.

 These internal auditors will visit branches one by one where and when required and carry out
auditing.

 Internal Audit may focus on any specified area or cover every aspect of the branch, depending on
its audit programme and requirement; main thing is it is conducted by the bank itself.

 However one important thing in internal audit is – information systems audit; information systems
audit is a new area gaining prominence in the last few years.

 With rapid computerization in banking sector – core banking, ATM's, mobile banking, internet
banking, completely computerized banking functions – it becomes necessary to have a periodical
review of how these systems are working.

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 Internal Control audit looks are the information flow, the channels, the security (of information)
etc.

 It also checks for the work ability of new banking software's and how it rates on security and
access.

Statutory Audit

 ‘Statutory Audit’ is conducted by a ‘Statutory Auditor’ – the word ‘statute’ means – mandated or
compulsorily required by any law or Act; in Bank’s case it is the RBI mandate.

 Every year around the very last days of March (end of financial year) and the beginning of April
(first two weeks of April) – in every branch of every bank a very rigorous activity is held – know
as the year end audit or the statutory audit!

 This audit is the most important event for a bank as this decides among other things – the NPA!

 Which by now, I think most of you would know and appreciate how important it is for any bank –
NPA and its provisioning affect the profits of a bank and hence the Balance Sheet and Profit and
Loss Account and finally the shareholder’s dividends. Thus Statutory Audit is very important.

 Statutory Auditors are appointed by RBI in association with the ICAI, to em-panel Chartered
Accountants for the job.

 Statutory Audit does not look at the nitty-gritties of the banking transactions (these are looked at
by concurrent and internal audits); instead they rely on the concurrent audit reports and test
checking to form their opinion.

 Statutory Audit mainly looks at the loans and advances, compliance with PSL requirements, CRR,
SLR etc. and other statutory norms compliance as per the latest RBI circulars.

Thus Bank Audit is an important activity undertaken by internal and external auditors, to ensure no
fraud is being committed – the overall aim to ensure fair and just banking practice.

The internal audit function

The internal audit function plays a crucial role in the ongoing maintenance and assessment of a
bank’s internal control, risk management and governance systems and processes – areas in which
supervisory authorities have a keen interest. Furthermore, both internal auditors and supervisors use
risk based approaches to determine their respective work plans and actions. While internal auditors
and supervisors each have a different mandate and are responsible for their own judgments and
12
assessments, they may identify the same or similar/related risks.
The internal audit function should develop an independent and informed view of the risks faced by
the bank based on their access to all bank records and data, their enquiries, and their professional
competence. The internal audit function should be able to discuss their views, findings and
conclusions directly with the audit committee and the board of directors, thereby helping the board to
oversee senior management.

(a) Risk management

A bank’s risk management processes support and reflect its adherence to regulatory provisions and
safe and sound banking practices. Therefore, internal audit should include in its scope the following
aspects of risk management:
• the organization and mandates of the risk management function including market, credit, liquidity,
interest rate, operational, and legal risks;
• evaluation of risk appetite, escalation and reporting of issues and decisions taken by the risk
management function;
• the adequacy of risk management systems and processes for identifying, measuring, assessing,
controlling, responding to, and reporting on all the risks resulting from the bank’s activities;
• the integrity of the risk management information systems, including the accuracy, reliability and
completeness of the data used; and
• the approval and maintenance of risk models including verification of the consistency, timeliness,
independence and reliability of data sources used in such models.
When the risk management function has not informed the board of directors about the existence of a
significant divergence of views between senior management and the risk management function
regarding the level of risk faced by the bank, the head of internal audit should inform the board about
this divergence.

(b) Capital adequacy and liquidity

Banks are subject to the global regulatory framework for capital and liquidity as approved by the
Committee and implemented in national regulation. This framework contains measures to strengthen
regulatory capital and global liquidity. The scope of internal audit should include all provisions of this
regulatory framework and in particular the bank’s system for identifying and measuring its regulatory
capital and assessing the adequacy of its capital resources in relation to the bank’s risk exposures and
established minimum ratios.
Internal audit should review management’s process for stress testing its capital levels, taking into
account the frequency of such exercises, their purpose (e.g., internal monitoring vs. regulator
13
imposed), the reasonableness of scenarios and the underlying assumptions employed, and the
reliability of the processes used.
Additionally, the bank’s systems and processes for measuring and monitoring its liquidity positions
in relation to its risk profile, external environment, and minimum regulatory requirements, should fall
within the audit universe.

(c) Regulatory and internal reporting

In addition to the matters identified above, internal auditors should regularly evaluate the
effectiveness of the process by which the risk and reporting functions interact to produce timely,
accurate, reliable and relevant reports for both internal management and the supervisor.
This includes standardized reports which record the bank’s calculation of its capital resources,
requirements and ratios. It may also include public disclosures intended to facilitate transparency and
market discipline such as the Pillar 3 disclosures and the reporting of regulatory matters in the bank’s
public reports.

(d) Compliance

The scope of the activities of the compliance function should be subject to periodic review by the
internal audit function.
Compliance laws, rules and standards include primary legislation, rules and standards issued by
legislators and supervisors, market conventions, codes of practice promoted by industry associations,
and internal codes of conduct applicable to the staff members of the bank. The audit of the compliance
function should include an assessment of how effectively it fulfill its responsibilities.

(e) Finance
A bank’s finance function8 is responsible for the integrity and accuracy of financial data and
reporting. Key aspects of Finance’s activities (e.g. calculations, profit and loss valuations and
reserves) have an impact on the level of a bank’s capital resources and therefore associated controls
should be robust and consistently applied across similar risks and businesses. As such, it is important
that these controls are subject to periodic internal audit review, using resources and expertise to
provide an effective evaluation of bank practices.
Internal audit should devote sufficient resources to evaluate the valuation control environment,
availability and reliability of information or evidence used in the valuation process and the reliability
of estimated fair values. This is achieved through reviewing the independent price verification
processes and testing valuations of significant transactions.

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Internal audit function’s communication channels

References to support these communication channels for the internal audit function are provided in the
Committee’s Core Principles and other relevant guidance issued by the Committee, International
Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board,
and the standards of The Institute of Internal Auditors (The IIA) as indicated.

• Basel Committee on Banking Supervision:

– Core Principles for Effective Banking Supervision
– Principles for Enhancing Corporate Governance
– The Internal Audit Function in Banks

• IIA: International Standards for the Professional Practice of Internal Auditing.

Standards starting at 1xxx are Attribute Standards and Standards starting at 2xxx are Performance
Standards. See International Professional Practices Framework (IPPF), The Institute of Internal
Auditors, Altamonte Springs, Florida, USA, 2011.
– IIA 1000 - Purpose, Authority, and Responsibility
– IIA 1100 - Independence and Objectivity
– IIA 1110 - Organizational Independence
– IIA 1111 - Direct Interaction with the Board
– IIA 2440 - Disseminating Results

• ISA: International Standards on Auditing.

Standards starting at 2xx deal with the overall objectives and responsibilities of the external auditor,
standards starting at 3xx deal with risk assessment and response to assessed risk by the external
auditor and standards starting at 6xx deal with the external auditor's use of the work of others. See
Handbook of International Quality Control, Auditing, Review, Other Assurance, and related
Services Pronouncements, 2010 Edition Part 1, International Federation of Accountants, New York,
New York, USA.
– ISA 260 - Communication with Those Charged with Governance
– ISA 315 - Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and Its Environment
– ISA 610 - Using the Work of Internal Auditors

The Bank Auditing Procedure

15
Specialist accountants, known as bank auditors, have the responsibility of reviewing banks and
financial entities. One of their primary duties is to focus on the accuracy, completeness and legitimacy
of the banks financial activities.

This procedure is similar to that of official auditing reports that companies must file therefore it is not
a procedure that should cause alarm for banks requiring an audit. The majority of banks and financial
institutions find the bank auditing procedure a strenuous experience; however it is one of the most
important procedures that must be completed periodically.

Some of the procedures and services reviewed in the bank audit are outlined below; however this list
is not exhaustive:

 Financial transactions

 Bank wires

 Automated clearing house (ACH)

 Bank account monetary flow

Most banks undergoing a bank audit may request their clients for additional documents or information
for their records. Clients are requested to assist the bank in fulfilling all the criteria that the bank
auditor has outlined,thus completing the process in a professional and timely manner.

The primary focus of the bank auditing procedure is to ensure that the bank or financial entity is
operating in compliance with all jurisdictional regulations. More ever, this procedure enables the bank
to review all the services they offer and make sure that their records are up to date.

Principal Enactments Governing Bank Audit:

♦ Banking Regulation Act, 1949

♦ State Bank of India Act, 1955

♦ Companies Act, 1956

♦ State Bank of India (Subsidiary Banks) Act, 1959

♦ Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970

♦ Regional Rural Banks Act, 1976

♦ Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980

♦ Information Technology Act, 2000

16
♦ Prevention of Money Laundering Act, 2002

♦ Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002

♦ Credit Information Companies Regulation Act, 2005

♦ Payment and Settlement Systems Act, 2007

STAGES IN AUDITING

1)Preliminary work:

a) The auditor should acquire knowledge of the regulatory environment in which the bank
operates.Thus,the auditor should familiarize himself with the relevant provisions of applicable laws
and ascertain the scope of his duties and responsibilities in accordance with such laws. He should be
well acquainted with the provisions of the Banking Regulation act, 1956 in the case of audit of a
banking company as far as they relate of preparation and presentation of financial statements and their
audit.

b) The auditor should also acquire knowledge of the economic environment in which the bank
operates. Similarly, the auditor needs to acquire good working knowledge of the services offered by
the bank. In acquiring such knowledge, the auditor needs to be aware of the many variation in the
basic deposit, loan and treasury services that are offered and continue to be developed by banks in
response to market conditions. To do so, the auditor needs to understand the nature of services
rendered through instruments such as letters of credit, acceptances, forward contracts and other similar
instruments.

c) The auditor should also obtain and understanding of the nature of books and records maintained
and the terminology used by the bank to describe various types of transaction and operations. In case
of joint auditors, it would be preferable that the auditor also obtains a general understanding of the
books and records, etc, relating to the work of the other auditors, In addition to the above, the auditor
should undertake the following: ·

 I. Obtaining internal audit reports, inspection reports, inspection reports and concurrent audit
reports pertaining to the bank/branch.

 II. Obtaining the latest report of revenue or income and expenditure audits, where available.

 In the case of branch auditors, obtaining the report given by the outgoing branch manager to
the incoming branch in the case of change in incumbent at the branch during the year under
audit, to the extent the same is relevant for the audit.

17
 d) RBI has introduced and off site surveillance system for commercial banks on various aspects of
operations including solvency, liquidity,asset quality, earnings, performance, insider trading etc., and
has indicated that such reports shall be submitted at periodic intervals from the year commencing 1-
04-1995. It will be appropriate to be familiar with the reports submitted and to review them to the
event that they are relevant for the purpose of audit.

e) In a computerized environment the audit procedure may have to appropriately tuned to the
circumstances, particularly as the books are not authenticated as in manually maintained accounts and
the auditor may not have his in-house computer facility to taste the software programs. The emphasis
would have to be laid on internal control procedure related to inputs, security in the matter of access to
EDP system, use of codes, passwords, data inputs being prepared by person independent of key
operators and other build-in procedure for data validation and system controls as to ensure
completeness and correctness of the transaction keyed in. system documentation of the software may
be obtained and examined.

f) One set of tests that the auditor at both the branch level and head office level may apply for audit
of banks in analytic procedure.

2) Evaluation of internal control system: It may be noted that transaction in banks are voluminous
and repetitive, and fall into limited categories/heads of account. It may, therefore, be more appropriate
that the evaluation of the internal control is made for each class/category of transaction. If the exercise
of internal control evaluation is properly carried out, it assist the auditor to determine the effectiveness
or otherwise of the control systems and accordingly enable him to strengthen his audit procedures, and
lay appropriate emphasis on the risk prone areas. Internal control would include accounting control
administrative controls.

a) Accounting controls: Accounting controls cover areas directly concerned with recording of
financial transactions and maintenance of such registers/records as to ensure their reliability.Internal
accounting controls are also envisaging such procedures as would determine responsibility and fix
accountability with regard to safeguarding of the assets of the bank. It would not be out of place of
mention that there is a distinction between accounting system and internal accounting controls.
Accounting system envisages the processing of the transaction and events, their recognition, and
appropriate recording. Internal controls are techniques, method and procedures so designed and
usually built into systems, as would enable prevention as well as detection of errors, omissions or
irregularities in the process of execution and recording of transaction/events. The internal accounting
controls as would ensure prevention of errors, omissions and irregularities would include following:

I. No transaction can be registered/recorded unless it is sanctioned/approved by the designated

authority

18
 II. Built- in dual control/supervisory procedures ensure that there is an independent automatic
check on input/vouchers.

III. No single person has authority to initiate transaction and record through all stages to the
general ledger. Each day transactions are accurately and promptly recorded, and the control and
subsidiary records are kept balanced through personnel independent of each other. The auditor would
be well advised to look into other areas may lead to detection of errors, omissions and irregularities,
inter alias in the following:

a) Missing/loss of security paper, stationery forms.

b) Accumulation of transactions/balances in nominal heads of accounts like suspense, sundries,

inter-branch accounts, or other nominal head of accounts particularly if there accounts particularly if
these accounts are extensively used to balance books, despite availability of information.

c) Accumulation of old/large unexplained/unsubstantiated entries in accounts with Reserve Bank

of India and other banks and institutions.

d) Transaction represented by mere book adjustments not evidenced/substantiated or upon non-

honoring of contracts/commitments.

e) Origination debits I head office accounts/inter-branch accounts.

f) Analytic review procedure.

g) Serious irregularities pointer out in internal audit/inspection/special audit

h) Complaints/matters pending in the vigilance/grievances cell, as regards discrepancies in

accounts of constituents, etc.

i) Results of periodic analytic review, if observed as adverse.

b) Administrative control:

These are broadly concerned with the decision making process and laying down of
authority/delegation of powers by the management. It may be noted that in the normal course, the
head office use the zonal/regional offices do not conduct any banking business. They are generally
responsible for administrative and policy decisions which are executed at the branch level.

3) Preparation of audit programme for substantive testing and its execution Having familiarized
him the requirements of audit, the auditor should prepare an audit programme for substantive testing
which should adequately cover the scope of his work. In framing the audit programme, due weight-
age should be given by the auditor to areas where, in his view, there are weaknesses in the internal

19
controls. The audit programme for the statutory auditors would be different from that of the branch
auditor. At the branch level, basic banking operation are to be covered by the audit. On the other hand,
the statutory auditors at the head office ( provisions for gratuity, inter-office accounts, etc.). The scope
of the work of the statutory auditors would also involve dealing with various accounting aspects and
disclosure requirements arising out of the branch returns.

4) Preparation and submission of audit report The branch auditor forwards his report to the
statutory auditors who have to deal with the same in such manner, as they considered necessary. It is
desirable that the branch auditors’ reports are adequately in unambiguous terms. As far as possible, the
financial impact of all qualification or adverse comments on the branch accounts should be clearly
brought out in the branch audit report. It would assist the statutory auditors if a standard pattern of
reporting, say, head wise, commencing with assets, then liabilities and thereafter items related to
income and expenditure, is followed. In preparing the audit report, the auditor should keep in mind the
concept of materiality. Thus, items which do not materially affect the view presented by the financial
statements may be ignored. However, in the judgement of the auditor, an item though not material, is
contrary to accounting principles or any pronouncements of the Institute of Chartered Accountants of
India or in such as would require a review of the relevant procedure, it would be appropriate for him
to draw the attention of the management to this aspect in his long form audit report. In all cases,
matters covering the statutory responsibilities of the auditor should be dealt with in the main report.
The LFAR should be used to further elaborate matters contained in the main report and as substitute
thereof. Similarly while framing his main report, the auditor should consider, wherever practicable,
the significance of various comments in his LFAR, where any of the comments made by the auditor
there in is adverse, he should consider whether qualification in his main report is necessary by using
his discretion on the facts and circumstances of each case. In may be emphasized that the main report
should be self-contained document.

Provisions relating to audit

1. Appointment of the auditors;

The auditor of a banking company, a nationalized bank or a regional rural bank has to be a person
who is duly qualified under law to be an auditor of companies. Thus,the auditor of the companies
under sec 226 of the companies Act 1956, and who does not attract any disqualification laid down
therein. The auditor of a nationalized bank is appointed by the board of directors of the bank
concerned, whereas the auditor of a banking company is appointed by the shareholder at the annual
general meeting. Previous approval of RBI for appointment of the auditor is required in the both cases.
The auditors of the state bank of India are appointed by RBI in consultation of the Central
government. The auditors of the subsidiaries of the state bank of India are appointed by the state bank
of India. It may be mentioned in the State bank of India Act 1955, specially provides for the
20
appointment of the ‘two or more auditors’. The auditors of the regional rural banks concerned with the
approval of the Central Government. The appointment of auditor of a co-operative bank is governed
by the relevant Co-operative bank is governed by the relevant Co-operative Societies Act.

Procedure for the Appointment in the case of nationalized banks:-

The statutory central auditors are appointed by the bank concerned on the basis of the names
recommended by the RBI from out of panel of auditors. For this purpose, the RBI formulates detailed
norms on the basis of which a panel is created by the Comptroller and Auditor General of India.
Generally, each nationalized bank appoints 4-6 statutory central auditors. As per the norms prescribed
by the RBI, to be eligible for empanelment, a firm should, as on January 1 of the relevant year,
minimum eligibility norms relating to;

I . Number of full time partners,

II . Numbers of FCA partners,

III .Number of years the firm has been existence ,

IV. Period of minimum continuous association of partners with the firm,

V. Number of full time charted accountants,

VI.Number of professional staff ,

VII.Experience of statutory audit of public sector banks having deposits of at least the prescribed
sum,

VIII .Experience of statutory audit of public sector undertakings. At least one partner should have
qualifications in computer audit.

2. Powers of the Auditor

The auditor of a bank has same powers as those of company auditor ,except that the power the
auditor of a co-operative are governed by the relevant Co-operative Societies Act in matter of access
to the books of accounts, documents, and vouchers. He is also entitle to require from the offices of the
bank such information and explanation as he may think necessary for the performance of his duties. In
case of Banking Company, he is entitle to receive notice relating to any general meeting. He is also
entitle to attend any general meeting and to be heard there at on any part of the business, which
concern him as auditor. It is important to note that the auditor of nationalized bank may employ
accountants or other person at the expenses of bank to assist him in audit of accounts. Thus auditor of
these banks can appoint the auditor of Branches.

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 3.Auditor’s Report

The auditor of the nationalized bank, State bank of India or its subsidiary is required to report to
the central government and has to state the full in his report:

a) Whether, in his opinion, the balance sheet is a full & fair balance sheet containing all the
affairs of the bank, and in the case he had called for any explanation or information, whether it has
been given and whether it is satisfactory.

b) Whether or not the transactions of the banks, which have come to notice have been within the
powers of the banks;

c) Whether or not the returns received from the offices and branches of the bank have been
found adequate for the purpose of the audit;

d) Whether the profit or loss a/c shows a true balances of the profit or loss for the period covered
by such account; and

e) Any other matter which he considers should be brought to the notice of the central
government. The report of the auditor of the nationalized bank is to be verified, signed, and
transmitted to the central government. The auditor has also to forward a copy of the audit report to the
bank concerned and to the RBI.

In addition to the matters which he is required to state in his report under the companies Act, the
auditor of banking company incorporated in India has also to state the following in his report to the
shareholder:

a) Whether or not the information and explanations required by him have been found to be
satisfactory;

b) Whether or not the transactions of the company which have come to his notice have been within
the powers of the company;

c) Whether or not the returns received from branch offices of the company have been found
adequate for the purposes of his audit;

d) Whether the profit and loss account shows a true balance of profit or loss for the period covered
by such account; Any other matter which he considers should be brought to the notice of the
shareholders of the company.

It may be noted that in in the case of a banking company the auditor has to specifically report
whether, in his opinion, the profit & loss account and balance sheet of the banking company comply
with the accounting standard referred to in sub- section (3C) of the sec 211 of the Companies Act,
22
1956.

It may also be noted the Companies(Auditor’s Report) Order [CARO] 2003 (Revised in 2005) is not
applicable to Banking Company.

Approach to banks audits:-

The guidance note on the audit of banks issued by the ICAI, recognize that the general approach to
audit of banks involves essentially the same stages as in any other audits. However at each stage, the
auditor has to take into the account the following special characteristics of banks;

• Custody of large volumes of monetary items, thereby requiring formal operating procedure, well-
defined limits on the individual discretion and rigorous internal control.

• Large volume and variety of the transactions and continuing development of new products and
services, many of which may involve complex accounting.

• Wide geographical dispersal of the operations with consequent difficulties in maintaining uniform
operating practices and accounting systems, particularly in the case of the overseas operations.

• Significant commitments without transfer funds not requiring formal recognition's in the books of
accounts.

• Special nature of risk with operations.

• A strict legal and regulatory framework that inter alias, influence the accounting and auditing.

LIST OF DOCUMENTS OF BANK AUDIT

 Bank closing set: It contains Balance Sheet, Profit & Loss A/c and other annexures.

 Audit Report

 Statutory Audit Report

 Compliance Certificate

 Form 3CA

 Form 3CD

 Long Form Audit Report (LFAR)

 Memorandum of Changes

 Report on Ghosh and Jilani committee recommendations

23
 AUDIT PLANNING

 Proper allocation of work among Audit Team should be done for smooth performance of Audit.

 A checklist of work to be done should be made with time frame, which should be specifically
adhered to

 Review latest available inspection report and concurrent audit report of branch.

 Review closing circular issued by HO

 Study business Mix of branch to decide the sample size and mix.

 Study of significant policies of the branch and computer system.

 Study the previous year’s Statutory Audit Report and LFAR

 Ask for ‘Stress List’ from Branch

 Give special importance to clients whose names are in Stress List, or which are highlighted in
Concurrent Audit Report. Keep a note of points you come across during audit, which are relevant
for LFAR.

 STATUTORY AUDIT REPORT 

It contains the following Paragraph:

 Report on Financial Statement

 Managements responsibility for the financial statements

 Auditors responsibility

 Opinion

 Report on other legal and regulatory requirements

 It is enclosed with certificate of compliance of guidelines of Reserve Bank of India on income

recognition and asset qualification.

 It is addressed to Statutory Central Auditors.

 TAX AUDIT REPORT

 Tax Audit Report is done under section 44AB of the IT Act

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 Form 3CA

 Form 3CD

 Annexure Part – A

 All the annexure of Form 3CD are to be enclosed, even if they are NIL

 LONG FORM AUDIT REPORT

 A questionnaire formulated by RBI.

 To be filled by auditor after discussing the points with Branch Head.

 It is advisable to cover LFAR and audit program simultaneously.

 This would enable auditor to consider effect of matters on LFAR and audit report.

 Format of LFAR form may be found online easily.

 AUDIT ASPECT OF ITEMS OF BALANCE SHEET

 ADVANCES

 Check if proper documentation is done while sanctioning of loans.

 Check income recognition, Asset classification and Provisioning for the advances.

 An asset is said to Non Performing if:

 Interest and/or Installment remain overdue for more than 90 days.

 If the account continuously remains in excess of sanctioned limit/drawing power.

 No credit in account for 90 days or credit is not enough to cover the interest debited during the
period.

 The installment or interest remains overdue for 2 crop season for short duration crops.

 The installment or interest remains overdue for 1 crop season for long duration crops.

 If credit facility is not renewed within 180days from the due date

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 Drawings are allowed against stock/ book debt statement which are older than 180 days

 If the account continuously remains in excess of sanctioned limit/drawing power.

 No credit in account continuously for 90 days, or credits is not enough to cover the interest
debited during the period.

 The installment or interest remains overdue for 2 crop season for short duration crops.

 The installment or interest remains overdue for 1 crop season for long duration crops.

 Drawings are allowed against stock/book debt statement which are older than 180 days.

 Income Recognition Policy:

 Income recognition from NPA is to be based on recovery.

 If an account turns NPA, branch should reverse the interest already charged and not Collected,

 Such interest to be recorded in Dummy Ledger.

 Analysis of entries outstanding in:

 Suspense Account

 Sundry Debtors

 Sundry Creditors

 Sundry Deposits.

 Check for addition/deletion of assets.

 Check for balances held with other banks with certificate of closing balance from respective
banks.

 Check provisioning of expenses as on cut-off date.

 Deposits

 Contingent Liabilities

 Whether cash in Balance sheet tallies with physical Cash Book

 AUDIT ASPECT OF ITEMS OF PROFIT & LOSS

 Check whether all income are properly accounted for.

26
 Check if income on NPAs is not recognized.

 Check if Bank has charges Penal interests on default cases.

 Verify receipt of Locker Rent Vouch for expenses.

 Check if expenses are grouped in proper headings.

 Check whether TDS is deducted on expenses as per applicable sections and deposited to the credit
of government.

 Check items of ‘Misc Expenses’.

 Whether Reverse Charge on Service Tax has been created?

MEMORANDUM OF CHANGES

 FORMAT

 There should be clear justification for every change suggested by auditor

 Debit and Credit side of Mo C must tally.

 Total of reclassification of assets should be brought out in Mo C

 For NO CHANGE, NIL Mo C should be filed.

 No. Dr Cr In respect of Income & expenditure Yes/No xx xx In respect of Balance Sheet

Items Yes/No xx xx In respect of classification of advances Yes/No xx xx In respect of
closing return where the effect to be given is within the return itself other than Income &
Expenditure and Balance Sheet Yes/No xx xx

 Physical verification of cash on date of Audit. Also check if cash holding of branch is within
retention limit specified by HO.

 Verify KYC Compliance of Bank.

 Check whether any expense exceeding Rs 20000.00 is paid in cash. Get a certificate for
40A(3) Compliance.

 Physical verification of stationery and confirmation of balance as per CBS.

 Obtain Management Representation Letter from Bank

 Obtain Man-Days Certificate from Bank

STATUTORY AUDIT – CERTAIN ASPECTS 

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  Item Important Audit Checks

 A.Verification of Profit & Loss Account Item 

Income/ Expenditure Verify:

 Short debit of interest/ commission on advances;

 Excess credit of interest on deposits;

 In case the discrepancies are existing in large number of cases, the auditor should consider the
impact of the same on the accounts;

 Determine whether the discrepancies noticed are intentional or by error; Check whether the
recurrence of such discrepancies are general or in respect of some specific clients; ·

 Proper authority in sanction and disbursement of expenses as also the correctness of the
accounting treatment given as to revenue/ capital/ deferred expenses.

 Check accrual of income/ expenditure especially for the last month of the financial year. ·
Divergent Trends:

 Divergent trends in income/ expenditure of the current year may be analysed with the figures of
the previous year.

 Wherever a divergent trend is observed, obtain an explanation along with supporting evidences
like monthly average figures, composition of the income/ expenditure, etc.

 B. Verification of Balance sheet Item

1. Cash & Bank Balances:

 Physically verify the Cash Balance as on March 31, 2014 or reconcile the cash balance from the
date of verification to March 31, 2014.

 Confirm and reconcile the Balances with banks as on March 31, 2014.

2. Investments:

 Physically verify the Investments held by the branch on behalf of Head Office and issue
certificate of physical verification of investments to bank’s Investments Department.

 Check receipt of interest and its subsequent credit to be given to Head Office.

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3. Advances Provisioning:

 As per RBI norms, unrealised interest on NPA accounts should be reversed and not charged to
“Advance Accounts”. Reversal of unrealised interest of previous years in case of NPA accounts is
required to be checked.

 Partial Recovery in respect of NPA accounts should be generally appropriated against principal
amount in respect of doubtful assets.

4. Fixed Assets:

 Check Inter-branch transfer memos relating to Fixed Assets and whether they have been correctly
classified in the accounts and depreciation accounting thereof.

5. Inter Branch Reconciliation (IBR):

 Understand the IBR system and accordingly prepare an audit plan to review the IBR transactions.
The large volume of Inter Branch Transactions and the large number of unreconcile entries in the
Banking System makes the area fraud-prones. Check up head office inward communication to
branch to ascertain date upto which statements relating to inter branch reconciliation have been
sent

6. Deposit

i. Term

ii. Saving

iii. Current

iv. FCNR/ NRE/ NRNR 

 Verify transactions during the year relating to:

 New Accounts opened;

 Accounts closed;

 Dormant Accounts;

 Interest calculations;

 Test check account statements for unusual/ large/ overdraft transactions;

 Overdue Term deposits & banks policy for its renewal;

29
  Accrual of interest;

 RBI Norms for Non-resident deposits & its operations - with due importance to opening and
operation of accounts like NRE, NRNR, FCNR, RFC, etc.;

 Interest on various types of deposits; Tax Deducted at Source.

 Large deposits placed at the end of the year (probable window dressing).

 Examine unusual trend in account opening or account closing, dormant accounts that have
suddenly been reactivated by heavy cash withdrawals or deposits, overdrawing, etc.

 Examine interest trends as compared to average annual deposits (monthly average figures).

 Review the Master Circular on Maintenance of Deposit Accounts issued by RBI dated March
1, 2004 attached hereto.

7. Advances

 Review monitoring reports (irregularity reports) sent by the branch to the controlling
authorities in respect of irregular advances.

 Review appraisal system, Files of large as well as critical borrowers, sanctions, disbursement,
renewals, documentation, systems, securities, etc.

 Review on test check basis operations in the Advances Accounts.

 Compliance of sanction terms and conditions in the case of new advances.

 Whether the borrower is regular in submission of stock statements, book debt statements,
insurance policies, balance sheets, half yearly results, etc. and whether penal interest is
charged in case of default/ delay in submission of such data.

 Charge of interest and recovery for each quarter or as applicable to be verified.

 Review the monitoring system, i.e. monitoring end use of funds, analytical system prevalent
for the advances, cash flow monitoring, branch follow-up, consortium meetings, inspection
reports, stock audit reports, market intelligence (industry analysis), securities updation, etc.

 Check classification of advances, income recognition and provisioning as per RBI Norms/
Circulars.

 Examine interest trends as compared to average annual advances (monthly average figures).

 Scrutinise the final advances statements with regard to assets classification, security value,

30
 documentation, drawing power, out standings, provisions, etc.

 Check whether Non-Fund based (Letter of Credits/ Bank Guarantees) exposure of the
borrowers is within the sanctioned limits.

 Compare projected financial figures given at the time of project appraisal with actual figures
from audited financial statements for relevant period and ascertain reasons for large variance.

 Take into account the assessment of RBI if the regional office of RBI has forwarded a list of
individual advances to the bank, where the variance in the provisioning requirements between
the RBI and the bank is above certain cut off levels.

NECESSITY FOR MEASUREMENT OF NON-PERFORMING ASSETS:

· The repayment of interest/installment was either not easily forthcoming as per schedule or recovery.
Consequently, banks found it increasingly prudent not to reckon such interest/other charges as part of
their income and pay tax on unrealized income. Rather they chose to cease charging interest in such
accounts of bad/doubtful nature or where the prospectuses of recovery were bleak.

RBI Health Code System and Relation to NPA:

The Reserve Bank of India introduced the Health Code System of classification of borrower
accounts by banks in the year 1985. Based on this classification of advances, it was decided by the
Reserve Bank in the years 1989 and1990 that banks should cease charging interest compulsorily in
account under Health Code 5 to 8 i.e. Recalled, Suit-filled, Decreed and bad/doubtful and selectivity,
taking into account the availability and readability of security, in accounts under Health Code 4 i.e.
Stick: Non-viable/Sticky .

Asset Classification
Performing Asset:
Performing asset is one which generates periodical income and payments, as and when due or within
the minimum lag of two quarters. This is being cut down to one quarter from April 2004.
Non-Performing Asset (NPA):
The problem of NPA arises when the dues to the bank, interest/other charges or installments are not
being received as per schedule. To justifiably set right this phenomenon, the Reserve Bank of India
has drawn upon the international standards of accounting for the purpose of NPA treatment of credit
facilities. A loan asset will become NPA if the due amount is not paid within one quarter.

Current position of NPA triggers :

Term loan Installment remain overdue for a period of
31
 more than 90 days.
Overdraft/Cash Credit Account remains out of order for a period of
more than 90 days.

Bill purchased/Discounted Overdue for more than 90 days from its due
date
Agriculture Loans Interest and/or installment remain overdue
for a period of more than 2 harvest seasons
but not more than 2 half years.
Any Amount To be received remains overdue for a period
more than 90 days

CATEGORIES OF NPA

 Sub-standard Assets: A sub-standard asset was one, which was classified as NPA for a period not
exceeding two years. With effect from 31 March 2001, a sub-standard asset is one, which has
remained NPA for a period less than or equal to 18 months and from 2005 it is further reduced to
12 months.

 Doubtful Assets: A doubtful asset was one, which remained NPA for a period exceeding two
years. With effect from 31 March 2001, an asset is to be classified as doubtful, if it remained NPA
for a period exceeding 18 months. With effect from March31, 2005, an asset would be classified
as doubtful if it remained in the sub-standard category for 12 months.

 Loss Assets: Assets which are classified as bad and non-recoverable by the concerned bank or by
Statutory Auditors or by RBI Inspectors but the amount have not been written off wholly. In other
words, such an asset is considered uncollectible and of such little value that its continuance as a
bankable asset is not warranted, they will continue to appear in the Balance Sheet but under the
heading “Loss Asset” although there may be some salvage or recovery value.

Provisions

The current position of providing provision on the various assets is as follows:

Standard assets General Provision 0.40% of Balance

Outstanding

Sub-Standard assets General provision of 10% of Balance

outstanding without considering DICGC or
ECGC Guarantees

32
 Doubtful Assets 100% of Unsecured portion after considering
the realizable value of security which should
be realistic. In addition to the above provision
on the secured portion should be made as
under: Up to 1 year 20%, 1year to 3 years 30%,
More than 3 year 50%

Loss Assets 100% on the Balance outstanding

Checklist to verify validity of NPA Classification

An auditor should ensure that branches for treating an account as NPA do the following or
otherwise, irrespective of the cutoff point of limit outstanding balance. Obtain the ‘balance book’ for
loans, cash credit and overdraft. This gives you the exhaustive list of accounts outstanding as on the
date of your inspection or the date of classification. By use of this balance book, you can ensure that
you can cover all the accounts and you do not skip accidentally the classification of any account.

The totals of the report of classification should match with the totals of the concerned departments
thereby ensuring that all the accounts are considered.

Analysis of the account should be done since ’income recognition’ is the underlying criteria.
Therefore obtain the copy of the branch of the account statements to verify the classification made by
the Bank. Ensure the following points during your scrutiny of the account. Both interest and
installments, wherever applicable should be taken into account for assessing the NPA status of an
account. If a particular facility of a borrower becomes NPA. Then all the facilities granted to the
borrower should be treated as NPA.

Advances backed by Central/State Governments should not be treated as NPA. Advances against
bank’s fixed deposits, NSC, IVPs, KVPs, and life Policies eligible for surrender, should not be treated
as NPAs

In the case of agricultural advances, NPA status should be decided upon after considering the
recovery of interest dues for two harvest seasons.Net-worth of borrower/guarantor and availability of
security is no consideration for treating an account as NPA or otherwise, as the concept is based on
record of recovery of interest/installments.Staff loans should not be treated as NPAs, except in
exceptionally problematic cases.

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 AUDIT OF A BANKING COMPANY

The balance sheet and the profit and loss account of a banking company have to be audited as
stipulated under Section 30 of the Banking Regulation Act, 1949. Every banking company’s account
needs to be verified and certified by the Statutory Auditors as per the provisions of legal frame work.
The powers, functions and duties of the auditors and other terms and conditions as applicable to
auditors under the provisions of the Companies Act are applicable to auditors of the banking
companies as well. The audit of banking companies books of accounts calls for additional details and
certificates to be provided by the auditors.They include:Whether or not;information and explanation,
required by the auditor were found to be satisfactory;the transaction of the company, as observed by
the auditor were within the powers of the company; profit and loss account shows a true picture of the
profit or loss for the period for which the books have been audited and any other observations to be
brought to the notice of the shareholders;

Special responsibility is cast on the bank auditor in certifying the bank’s balance sheet and profit and
loss account, since that reflects the sound financial position of the banking company. Apart from the
balance sheet audit, Reserve Bank of India is empowered by the provisions of the Banking Regulation
Act, 1949 to conduct/order a special audit of the accounts of any banking company. The special audit
may be conducted or ordered to be conducted, in the opinion of the Reserve Bank of India that the
special audit is necessary; in the public interest and/or in the interest of the banking company and/orin
the interest of the depositors.The Reserve Bank of India’s directions can order the bank to appoint the
same auditor or another auditor to conduct the special audit. The special audit report should be
submitted to the Reserve Bank of India with a copy to the banking company. The cost of the audit is to
be borne by the banking company.

Audit of Banks also involve:-

1.Bank Reporting
Risk information is often presented in a piecemeal manner in bank annual reports, spread between
the audited financial statements and the unaudited front sections. Banks need to focus on clearer
presentation which allows users to understand the big picture, which is currently often obscured by
the volume of detailed information. Summary risk statements are a potential way of providing this
big picture. Auditors should be asked to provide assurance on new summary risk statements to
provide confidence to readers of financial statements. Audit committees have an important role to
play in supporting better reporting. Auditors play a key role in making sure audit committees are
equipped with the information they need to perform their role. A guide to good practice in audit
committee reporting would help improve performance.

34
2.Auditor Reporting
Audits provide greater levels of confidence in information presented by directors by providing an
independent opinion on its truth and fairness. Insufficient information is provided under the current
framework about the work that underpins an audit. This makes it difficult for investors to assess the
performance of bank auditors or to understand the key areas of challenge. To address this gap,
banks should confirm that key areas of judgement discussed with auditors are set out in the critical
accounting estimates and judgements disclosures in the financial statements. The Financial Services
Faculty will set up a forum for investors and auditors to help make the audit more transparent.
Auditors should also have more involvement in reporting on the front sections of annual reports.
Their responsibilities for this are currently very limited.

3.Dialogue with supervisors

Regular exchange of information between auditors and bank supervisors enables both parties to
perform their duties more efficiently and effectively.There have been improvements in both the
frequency and quality of dialogue but this remains variable and is dependent upon the attitude of
individual supervisors. Further improvements are needed, including improvements to promote
greater consistency between supervisors and ensure that discussions are a two-way process for
information sharing.

4.Support for supervision

Auditors and other external experts have particular skills that can support banking supervisors in
performing their functions. Supervisors have the power to utilize these skills but have done so
rarely, typically only where particular problems have been identified. There is scope for making
greater use of external experts on a thematic basis, as part of supervisors’ overall monitoring regime
and as preventative or diagnostic measures.
INSPECTION OF A BANKING COMPANY

As per Sec 35 of the Banking Regulation Act, the Reserve Bank of India is empowered to conduct an
inspection of any banking company. After conducting the inspection of the books, accounts and
records of the banking company a copy of the inspection report to be furnished to the banking
company. The banking company, its directors and officials are required to produce the books, accounts
and records as required by the RBI inspectors, also the required statements and/or information within
the stipulated time as specified by the inspectors.

GOVERNMENT’S ROLE

The Central Government may direct the Reserve Bank to conduct inspection of any banking company.
In such cases, a copy of the report of inspection needs to be forwarded to the Central Government. On

35
review of the inspection report, the Central Government can take appropriate action. In the opinion of
the Central Government if the affairs of the banking company are not being carried out in the interests
of the banking company, public and or depositors, the Central Government may prohibit the banking
company to accept fresh deposits direct the Reserve Bank to apply for winding up of the banking
company under the provisions of the Banking Regulation Act. Before taking action, the Government
has to give an opportunity to the banking company to explain their stand. Based on the response, the
Government can initiate appropriate action as required.

SCRUTINY

Apart from inspecting the books and accounts of the company, the Reserve Bank can conduct scrutiny
of the affairs and the books of accounts of any banking company. Like in the case of inspection, the
Reserve Bank can handle the scrutiny as required.

SUPERVISORY FUNCTION IN INDIA

The legal and institutional framework for bank supervision in India is provided under the Banking
Regulation Act, 1949. Until 1994, different departments in Reserve Bank of India were exercising
supervision over banks, non-banking financial companies and financial institutions. To keep a close
watch on financial markets and avoid recurrence of crisis in the financial system, the Board for
Financial Supervision was set up under the aegis Reserve Bank under Reserve Bank of India (Board
for Financial Supervision) Regulations, 1994 with the objective of paying undivided attention to the
supervision of the institutions in the financial sector.

To have better supervision and control, a separate board was constituted namely “The Board for
Financial Supervision” as per the provisions of the RBI. The Board has the jurisdiction over the
banking companies, nationalized banks, State Bank of India and its subsidiaries. The members of the
Board are: Governor of the Reserve Bank of India as the chairperson, Deputy Governors of the
Reserve Bank of India, and one of the deputy governors should be nominated by the Governor as the
full time vice chairman, four directors from the Central Board of the Reserve Bank nominated by the
Governor as members.

FUNCTIONS AND POWERS

The Board performs the functions and exercises the powers of supervision and inspection under the
RBI Act, with respect to different banking companies. The Board is assisted by the department of
supervision. The Board has to report to the Central Board on half yearly basis. The Board meets on a
monthly basis, with at least one meeting in a month. The vice chairman of the Board is the ex-officio
chairman of the committee.Apart from the above, the Governor may constitute an advisory committee
to offer advice from time to time to the Board. The council will have at least five members who have

36
special knowledge in different areas like accountancy, law, banking, economics, finance and
management. The Governor presides over the meetings and the other members of the council are the
vice chairman and other members.

CORE PRINCIPLES OF BANKING SUPERVISION

The Core Principles for Effective Banking Supervision are the de facto minimum standard for sound
prudential regulation and supervision of banks and banking systems. Originally issued by the Basel
Committee on Banking Supervision in 1997, they are used by countries as a benchmark for assessing
the quality of their supervisory systems and for identifying future work to achieve a baseline level of
sound supervisory practices. The RBI has continued with the post-liberalization strategy of setting
prudential norms based on international best practices within which banks are left free to operate. The
compliance of the Bank with the Basel Committee’s Core Principles on Banking Supervision was
gone into in great detail and the gaps in supervision were addressed by setting up seven in-house
groups to make necessary recommendations.The reports of these groups were discussed by the BFS in
a specially convened session and the agenda set for action to be taken to bridge the gaps. Since then,
the compliance is being monitored on a regular basis. The BFS also authorized the release in the
public domain of the assessment of compliance, and this document is being shared with overseas
supervisory agencies and international financial institutions. The IMF also completed an assessment
using the revised methodology of the Core Principles which was in line with the Bank’s own
assessment.

RBI’s efforts in this area have been well recognized in international forums and in August 1999, it was
made a Member of the Core Principles Liaison Group (CPLG) of the Basel Committee for Banking
Supervision, which has been set up to promote the implementation of the Core Principles world-wide.
RBI has also examined the proposed New Capital Adequacy Framework currently under discussion by
the BCBS, and has communicated its response to the Basel Committee. RBI is also represented on the
Working Group of Capital of the Core Principles Liaison Group, which has been constituted to obtain
the inputs of the non G-10 countries in the international standard setting exercise.

PRECONDITIONS FOR EFFECTIVE BANKING SUPERVISION

 sound and sustainable macroeconomic policies;

 a well established framework for financial stability policy formulation;

 a well developed public infrastructure;

 a clear framework for crisis management, recovery and resolution;

 an appropriate level of systemic protection (or public safety net); and

37
 effective market discipline[xiv]

SUPERVISORY POWERS, RESPONSIBILITIES AND FUNCTIONS

There are twenty nine Core Principles in all out of which we enlist a few:

Responsibilities, objectives and powers: An effective system of banking supervision has clear
responsibilities and objectives for each authority involved in the supervision of banks and banking
groups.

Cooperation and collaboration: Laws, regulations or other arrangements provide a framework for
cooperation and collaboration with relevant domestic authorities and foreign supervisors.

Supervisory approach: An effective system of banking supervision requires the supervisor to

develop and maintain a forward-looking assessment of the risk profile of individual banks and
banking groups, proportionate to their systemic importance; identify, assess and address risks
emanating from banks and the banking system as a whole; have a framework in place for early
intervention.

Supervisory techniques and tools: The supervisor uses an appropriate range of techniques and tools
to implement the supervisory approach and deploys supervisory resources on a proportionate basis,
taking into account the risk profile and systemic importance of banks.

Supervisory reporting: The supervisor collects reviews and analyses prudential reports and statistical
returns from banks on both a solo and a consolidated basis, and independently verifies these reports
through either on-site examinations or use of external experts.

Corrective and sanctioning powers of supervisors: The supervisor acts at an early stage to address
unsafe and unsound practices or activities that could pose risks to banks or to the banking system. The
supervisor has at its disposal an adequate range of supervisory tools to bring about timely corrective
actions. This includes the ability to revoke the banking license or to recommend its revocation.

Internal control and audit: The supervisor determines that banks have adequate internal control
frameworks to establish and maintain a properly controlled operating environment for the conduct of
their business taking into consideration.

Financial reporting and external audit: The supervisor determines that banks and banking groups
maintain adequate and reliable records, prepare financial statements in accordance with accounting
policies and practices that are widely accepted internationally and annually publish information that
fairly reflects their financial condition and performance and bears an independent external auditor’s

38
opinion.

Disclosure and transparency: The supervisor determines that banks and banking groups regularly
publish information on a consolidated and, where appropriate, solo basis that is easily accessible and
fairly reflects their financial condition, performance, risk exposures, risk management strategies and
corporate governance policies and processes.

Abuse of financial services: The supervisor determines that banks have adequate policies and
processes, including strict customer due diligence rules to promote high ethical and professional
standards in the financial sector and prevent the bank from being used, intentionally or
unintentionally, for criminal activities.

39
Chapter 4

40
 Company Profile
STATE BANK OF INDIA

Founded 2 June 1806, Bank of Calcutta

27 January 1921, Imperial Bank of India

1 July 1955, State Bank of India

2 June 1956, nationalization

Headquarters Mumbai, Maharashtra, India

Area served Worldwide

Key People Rajnish Kumar (banker) (Chairman)

Products Consumer banking, corporate banking, finance and insurance, investment

banking, mortgage loans, private banking, private equity, savings,
securities, asset management,wealth management, credit cards

Revenue Rs. 298,640.45 crore (2017)

Operating income Rs. 50,847.90 crore (2017)

Profit Rs. 10,484.10 crore (2017)

Total Assets Rs. 2,705,966.30 crore (2017)

Total equity Rs. 144,274.65 crore (2017)

Owner Government of India (61.23%)

Number of 2,09,572 (2017)

employees

Website www.sbi.co.in

VISION

 MY SBI
 MY CUSTOMER
 MY SBI : FIRST IN CUSTOMER SATISFACTION

MISSION
 BE PROMPT, POLITE AND PROACTIVE WITH OUR CUSTOMERS

41
  SPEAK THE LANGUAGE OF YOUNG INDIA
 CREATE PRODUCTS & SERVICES THAT HELP OUR CUSTOMERS ACHIEVE THEIR
GOALS
 GO BEYOND THE CALL OF DUTY TO MAKE CUSTOMERS FEEL VALUED
 BE OF SERVICE EVEN IN THE REMOTEST PART OF OUR COUNTRY
 OFFER EXCELLENCE IN SERVICES TO THOSE ABROAD AS MUCH AS WE DO TO
THOSE IN INDIA
 IMBIBE STATE-OF-THE-ART TECHNOLOGY TO DRIVE EXCELLENCE
My SBI.My SB
I.State Bank of India Company Management Team
Board Of Directors
Name Designation
Mr.Rajnish Kumar Chairman
Mr.Sanjiv Malhotra Director
Mr.Pravin Hari Kutumbe Director
Mr.Bhaskar Pramanik Director
Mr.Basant Seth Director
Mr.Rajiv Kumar Director
Mr.B Sriram Managing Director
Mr.P K Gupta Managing Director
Mr.Dinesh Kumar Khara Managing Director
Mr.Chandan Sinha Nominee Director
Dr.Girish K Ahuja Nominee Director
Dr.Pushpendra Rai Nominee Director

Key Executives
Name Designation
Mrs.Anshula Kant Chief Financial Officer
Mr.S M Farooque Shahab Chief General Manager
Mr.P V S L N Murty Chief General Manager
Mr.Deepankar Bose Chief General Manager
Mr.Gautam Sengupta Chief General Managerv
Mr.Hardayal Prasad Chief General Manager
Mr.B Ramesh Babu Chief General Manager
Mr.Anil Kishora Chief General Manager
Mr.B V G Reddy Chief General Manager
Mr.K T Ajit Chief General Manager
Mr.Sanjiv Nautiyal Chief General Manager
Mr.Ajit Sood Chief General Manager
Mr.Alok Kumar Choudhary Chief General Manager
Mr.S Venkataraman Chief General Manager
Mr.Partha Pratim Sengupta Chief
42 General Manager
Mr.Sanjay Abhyankar Vice President & Co. Secretary
State Bank of India Capital Structure Analysis
From Year Class Of Authorized Issued Paid Up Paid Up Paid Up
to Year Share Capital Capital Shares Face Value Capital
(Crores) (Crores) (Nos) (Crores)
2015 - 2016 Equity 1,000 776.36 4,29,49,67, 1 214.75
Share 295
2014 - 2015 Equity 1,000 746.57 74,65,73,09 10 214.75
Share 2
2013 - 2014 Equity 1,000 746.57 74,65,73,09 10 214.75
Share 2
2012 - 2013 Equity 1,000 684.12 68,40,33,97 10 214.75
Share 1
2011 - 2012 Equity 1,000 671.13 67,10,44,83 10 214.75
Share 8
2010 - 2011 Equity 1,000 635.08 63,49,98,99 10 214.75
Share 1
2009 - 2010 Equity 1,000 634.97 63,48,82,64 10 214.75
Share 4
2008 - 2009 Equity 1,000 634.97 63,48,80,22 10 214.75
Share 2
2007 - 2008 Equity 1,000 631.56 63,14,70,37 10 214.75
Share 6
2006 - 2007 Equity 1,000 526.30 52,62,98,87 10 214.75
Share 8

Product Mix of State Bank of India Company

Product Year Month Sales Value Product Mix

Name (Rs. Crore) (%)
Interest & 2017 12 119,510.00 68.08
Discount on
Advances &
Bills
Interest 2017 12 6,049.46 3.44
Income From 2017 12 48,205.31 27.46
Investment
Interest On 2017 12 1,753.47 0.99
Balances with
RBI and
Other Inter-
Bank Funds

43
Auditors and Registrars
Auditors
Amit Ray & Co.
B Chhawchharia & Co.
Bansal & Co.
Brahmayya & Co.
Chatterjee & Co.
GSA & Associates
M Bhaskara Rao & Co.
Manubhai & Shah LLP
Mittal Gupta & Co.
Rao & Kumar
S L Chhajed & Co.
S N Mukherji & Co.
V Sankar Aiyar & Co.
Varma & Varma

Registrars
Datamatics Financial Services Ltd

44
 Chapter 5

KEY FINANCIAL RATIOS ANALYSIS

(Rs in Cr.) Mar 31, 2017 Mar 31, 2016 Mar 31, 2015 Mar 31, 2014 Mar 31, 2013
PER SHARE
RATIOS
Adjusted 155.69 150.40 17.55 145.88 206.20
45
EPS (Rs.)
Adjusted 158.57 152.59 19.04 163.75 222.86
Cash EPS
(Rs.)
Reported 13.15 12.82 17.55 145.88 206.20
EPS (Rs.)
Reported 16.02 15.01 19.04 163.75 222.86
Cash EPS
(Rs.)
Dividend Per 2.60 2.60 3.50 30.00 41.50
Share
Operating 22.17 21.64 23.38 199.45 236.63
Profit Per
Share (Rs.)
Book Value 196.53 185.85 172.04 1,584.34 1,445.60
(Excl Rev
Res) Per
Share (Rs.)
Book Value 236.14 185.85 172.04 1,584.34 1,445.60
(Incl Rev
Res) Per
Share (Rs.)
Net 220.13 210.86 10.20 9.20 14.26
Operating
Income Per
Share (Rs.)
Free 0.00 0.00 0.00 0.00 0.00
Reserves Per
Share (Rs.)

PROFITABILITY RATIOS
(Rs in Cr.) Mar 31, 2017 Mar 31, 2016 Mar 31, 2015 Mar 31, 2014 Mar 31, 2013
Operating 10.07 10.26 11.45 10.92 13.52
Margin (%)
Adjusted 59.92 61.74 8.12 7.89 11.23
Cash Margin
(%)
Adjusted 79.22 80.92 10.20 9.20 14.26
Return On
Net Worth
(%)
Reported 6.69 6.89 10.20 9.20 14.26
Return On
Net Worth
(%)
Return On 154.54 157.60 90.85 87.28 96.35
long Term
Funds (%)

LEVERAGE RATIOS
(Rs in Cr.) Mar 31, 2017 Mar 31, 2016 Mar 31, 2015 Mar 31, 2014 Mar 31, 2013
Long Term 0.00 0.00 0.00 0.00 0.00
Debt / Equity
46
Owners fund 7.11 7.69 7.53 7.81 7.59
as % of total
Source
Fixed Assets 0.08 0.08 0.08 0.09 0.09
Turnover
Ratio

LIQUIDITY RATIOS
(Rs in Cr.) Mar 31, 2017 Mar 31, 2016 Mar 31, 2015 Mar 31, 2014 Mar 31, 2013
Current 0.99 0.88 0.50 0.45 0.50
Ratio
Current 0.07 0.07 0.04 0.03 0.04
Ratio (Inc.
ST Loans)
Quick Ratio 11.94 10.84 10.78 13.88 12.15

Fixed Assets 0.08 0.08 0.08 0.09 0.09

Turnover
Ratio

PAYOUT RATIOS
(Rs in Cr.) Mar 31, 2017 Mar 31, 2016 Mar 31, 2015 Mar 31, 2014 Mar 31, 2013
Dividend 16.50 17.32 9.51 20.56 20.12
payout Ratio
(Net Profit)
Dividend 16.50 17.32 17.98 18.32 18.62
payout Ratio
(Cash Profit)
Earning 98.31 98.28 80.49 79.44 79.88
Retention
Ratio
Cash 98.34 98.30 82.02 81.68 81.38
Earnings
Retention
Ratio

COVERAGE RATIOS
(Rs in Cr.) Mar 31, 2017 Mar 31, 2016 Mar 31, 2015 Mar 31, 2014 Mar 31, 2013
Adjusted 16.17 14.61 110.90 114.06 78.90
Cash Flow
Time Total
Debt
Financial 1.47 1.42 0.41 0.38 0.43
Charges
Coverage
Ratio
Fin. Charges 1.11 1.11 1.15 1.14 1.20
47
Cov.Ratio
(Post Tax)

(Rs in Cr.) Mar 31, 2017 Mar 31, 2016 Mar 31, 2015 Mar 31, 2014 Mar 31, 2013
Material 0.00 0.00 0.00 0.00 0.00
Cost
Component
(% earnings)
Selling Cost 0.16 0.18 0.00 0.00 0.00
Component
Exports as 0.00 0.00 0.00 0.00 0.00
percent of
Total Sales
Import 0.00 0.00 0.00 0.00 0.00
Comp. in
Raw Mat.
Consumed
Long term 0.83 0.78 0.88 0.90 0.88
assets / Total
Assets
Bonus 0.00 0.00 0.00 0.00 0.00
Component
In Equity
Capital (%)

48
Chapter 6

49
 Annual Financial Results(figures in Rs. Crores)

Mar 31, Mar 31, Mar 31, Mar 31, Mar 31,
2017 2016 2015 2014 2013
Net Sales / Income 1,75,518.24 1,63,998.30 1,52,397.07 1,36,350.79 1,19,657.10

Other Income 35,460.93 27,845.37 22,575.89 18,552.92 16,034.84

Net Profit/Loss 10,484.10 9,950.65 13,101.57 10,891.17 14,104.98

Raw Material 0 0 0 0 0
Power And Fuel 0 0 0 0 0
Employee 26,489.28 25,113.83 23,537.07 22,504.28 18,380.90
Expenses
Excise Admin And 0 0 0 0 0
Selling Expenses
Research And 0 0 0 0 0
Devlopment
Expenses
Expenses 0 0 0 0 0
Capitalised
Other Expenses 19,983.49 16,668.54 15,140.57 13,221.57 10,903.52

Provisions Made 35,992.74 29,483.75 19,599.54 15,935.35 11,130.83

Interest 1,13,658.5 1,06,803.49 97,381.82 87,068.63 75,325.80

0
Gross Profit 50,847.90 43,257.81 38,913.50 32,109.24 31,081.72
Depreciation 0 0 0 0 0
Taxation 4,371.06 3,823.41 6,212.39 5,282.72 5,845.91
Extra Ordinary 0 0 0 0 0
Item
Prior Year 0 0 0 0 0
Adjustments
Equity Capital 797.35 776.28 746.57 746.57 684.03

Equity Dividend 0 0 0 0 0
Rate

Agg.Of Non- 0 0 309.11 30.91 25.78

Prom. Shares (in
lacs)
Agg.Of Non 0 0 0 0 0
PromotoHolding
(%)
EPS (in Rs.) 13.15 12.82 17.55 145.88 206.20

50
Audited Results of State Bank of India Company

(Rs in Cr.) Mar 31, 2017 Mar 31, 2016 Mar 31, 2015 Mar 31, 2014 Mar 31,
2013
Operating 1,75,518.24 1,63,685.31 1,52,397.07 1,36,350.79 1,19,657.10
Income
Manufactur 0 0 0 0 0
ing
Expenses
Personnel 26,489.28 25,113.82 23,537.07 22,504.28 18,380.90
Expenses
Selling 281.14 307.64 0 0 0
Expenses
Administrat 17,409.04 14,660.60 14,024.08 11,887.63 9,763.91
ive
Expenses
Expenses 0 0 0 0 0
Capitalised
Cost Of 1,57,837.96 1,46,885.55 1,34,942.98 1,21,460.54 1,03,470.61
Sales
Operating 17,680.28 16,799.75 17,454.10 4,890.26 1 16,186.49
Profit
Other 35,460.93 28,158.36 22,575.89 18,552.92 16,034.84
Recurring
Income
Adjusted 1,66,799.71 1,51,761.60 1,37,411.81 1,20,511.80 1,07,547.13
PBDIT
Financial 1,13,658.50 1,06,803.49 97,381.82 87,068.63 75,325.79
Expenses
Depreciatio 2,293.31 1,700.30 1,116.49 1,333.94 1,139.61
n
Other Write 0 0 0 0 0
offs
Adjusted 1,28,513.68 1,20,577.55 19,313.96 16,173.89 19,950.90
PBT
Tax 4,371.07 3,823.40 6,212.39 5,282.72 5,845.91
Charges
Adjusted 1,24,142.61 1,16,754.15 13,101.57 10,891.17 14,104.99
PAT
Non 0 0 0 0 0
Recurring
Items
Other Non 0 0 0 0 0
Cash
adjustments
Reported 10,484.10 9,950.65 13,101.57 10,891.17 14,104.99
Net Profit
Equity 1,802.19 1,683.81 2,036.63 1,941.26 2,462.79
Dividend
Preference 0 0 0 0 0
Dividend
Retained 1,22,034.36 1,14,736.15 10,544.61 8,651.80 11,266.58
Earnings

51
 Cash Flow Statement & Analysis

(Rs in Cr.) Mar 31, 2017 Mar 31, 2016 Mar 31, 2015 Mar 31, 2014 Mar 31,
2013
Profit Before 14,855.16 13,774.06 0 0 19,950.90
Tax
Net 11,060.32 11,196.55 0 0 21,661.23
CashFlow-
Operating
Activity
Net Cash -3,148.45 -3,748.37 0 0 -1,999.41
Used In
Investing
Activity
NetCash -1,780.27 4,505.88 0 0 -3,259.72
Used in Fin.
Activity
Net Inc/Dec 4,503.99 12,711.87 0 0 17,657
In Cash And
Equivlnt
Cash And 1,67,467.66 1,54,755.78 0 0 97,163.16
Equivalnt
Begin of
Year
Cash And 1,71,971.65 1,67,467.66 0 0 1,14,820.16
Equivalnt
End Of Year

52
 Balance Sheet

(Rs in Cr.) Mar 31, Mar 31, Mar 31, 2015 Mar 31, 2014 Mar 31,
2017 2016 2013
Equity Share 797.35 776.28 746.57 746.57 684.03
Capital
Share 0.00 0.00 0.00 0.00 0.00
Application
Money
Preference 0.00 0.00 0.00 0.00 0.00
Share Capital
Reserves & 1,55,903.06 1,43,498.16 1,27,691.65 1,17,535.68 98,199.65
Surplus
Secured Loans 0.00 0.00 0.00 0.00 0.00
Unsecured 20,44,751.39 17,30,722.44 15,76,793.22 13,94,408.53 12,02,739.53
Loans
Gross Block 42,344.99 9,819.16 9,329.16 8,002.16 6,595.71
Depreciation 0.00 0.00 0.00 0.00 0.00
Net Block 10,759.34 9,819.16 9,329.16 8,002.16 6,595.71
Capital Work- 573.93 570.12 0.00 0.00 409.31
in-progress
Investments 7,65,989.64 4,77,097.26 4,95,027.38 3,98,308.20 3,50,927.27
Current Assets, 1,54,007.73 1,40,408.40 68,835.55 43,545.90 47,892.03
Loans &
Advances
Total Net -1,227.46 -19,467.17 -68,862.50 -52,867.06 -47,563.04
Current Assets
Miscellaneous 0.00 0.00 0.00 0.00 0.00
expenses not
written
Book Value of 0.00 0.00 0.00 0.00 0.00
Unquoted
Investments
Market Value of 0.00 0.00 0.00 0.00 0.00
Quoted
Investments

53
 Contingent 11,12,081.33 10,64,167.70 10,93,422.55 10,91,358.32 9,93,018.46
liabilities
Number of 797.35 776.28 746.57 74.66 68.40
Equity shares
outstanding (in
Lacs)

SBI aims at optimising assets growth - taking into account Risk adjusted Return and Capital
Conservation.

Lending to large and mid-sized corporate has been impacted by the overall slowdown in corporate
capex. However, to negate the impact of the same we decided to further step-up our thrust on
retail loans. The move is aimed at optimizing Capital with Risk adjusted Return.
On the corporate side, a tepid borrowing appetite from highly leveraged corporates coupled
with low demand has resulted in tepid loan growth, even after a substantial fall in lending rates
over the past year. Furthermore,at SBI, new loans focus has been for highly-rated corporate
with strong credentials. SBI is cognisant of these challenges faced by corporate and expects a
turnaround in the asset quality to be gradual.In the meantime, our focus remains on strengthening
our performance while maintaining the quality of our assets. The retail segment has continued to drive
the credit growth of the Bank in FY2017. Home loans constitute Over 58% of the retail loans. Our
home loan portfolio has increased by 17%, to a significant market share of 25.88%. The auto loan
business demonstrated a similar trend, and registered a growth of21%. Here also, we enjoy a market
share of 27.16%. Our success in the retail segment has been a result of our wide distribution reach;
our use of digital technology to enhance customer experience; and stringent underwriting standards.
To be an enduring value creator,we need quality growth and focus on customers who help in driving
better returns while balancing our role as the country’s premier public sector Bank. We have been
evolving our retail channels and product strategies to become even more consumer friendly. We
aim to ensure a consistent and seamless customer experience across all channels, as our digital
technology platform has enabled us to enhance our overall service quality. Today, our retail business
remains the linchpin behind our strategy for strengthening our performance while maintaining
the quality of our assets.

54
Performance Indicators

55
56
Chapter 7

57
Accounting Policies of State Bank of India Company
Mar 31, 2017
1. Revenue recognition:
1.1 Income and expenditure are accounted on accrual basis, except otherwise stated. As regards Banks
foreign offices, income and expenditure are recognised as per the local laws of the country in which
the respective foreign office is located.
1.2 Interest/ Discount income is recognised in the Profit and Loss Account as it accrues except:
(i) income from Non-Performing Assets (NPAs), comprising of advances, leases and investments,
which is recognised upon realisation, as per the prudential norms prescribed by the RBI/ respective
country regulators in the case of foreign offices (hereafter collectively referred to as Regulatory
Authorities),
(ii) overdue interest on investments and bills discounted,
(iii) Income on Rupee Derivatives designated as , which are accounted on realisation.
1.3 Profit or Loss on sale of investments is recognised in the Profit and Loss Account. However, the
profit on sale of investments in the Held to Maturitycategory is appropriated (net of applicable taxes
and amount required to be transferred to statutory reserve), to Capital Reserve Account
1.4 Income from finance leases is calculated by applying the interest rate implicit in the lease to the
net investment outstanding in the lease, over the primary lease period. Leases effective from April 1,
2001 are accounted as advances at an amount equal to the net investment in the lease as per
Accounting Standard 19 issued by ICAI. The lease rentals
are apportioned between principal and finance income based on a pattern reflecting a constant periodic
return on the net investment outstanding in respect of finance leases. The principal amount is utilized
for reduction in balance of net investment in lease and finance income is reported as interest income.
1.5 Income (other than interest) on investments in Held to Maturity (HTM) category acquired at a
discount to the face value, is recognised as follows : a. On Interest bearing securities, it is recognised
only at the time of sale/ redemption. b. On zero-coupon securities, it is accounted for over the balance
tenor of the security on a constant yield basis.
1.6 Dividend is accounted on an accrual basis where the right to receive the dividend is established.
1.7 All other commission and fee incomes are recognised on their realisation except for:
(i) Guarantee commission on deferred payment guarantees, which is spread over the period of the
guarantee;
(ii) Commission on Government Business and ATM interchange fees, which are recognised as they
accrue; and
(iii) Upfront fees on restructured accounts, which is apportioned over the restructured period.
1.8 One time Insurance Premium paid under Special Home Loan Scheme (December 2008 to June
2009) is amortised over average loan period of 15 years.

58
1.9 Brokerage, Commission etc. paid/ incurred in connection with issue of Bonds/ Deposits are
amortized over the tenure of the related Bonds/ Deposits and the expenses incurred in connection with
the issue are charged upfront.
1.10 The sale of NPA is accounted as per guidelines prescribed by RBI :-
i. When the bank sells its financial assets to Securitisation Company (SC)/ Reconstruction
Company (RC), the same is removed from the books.
ii. If the sale is at a price below the net book value (NBV) (i.e., book value less provisions held),
the shortfall is debited to the Profit and Loss Account in the year of sale.
iii. If the sale is for a value higher than the NBV, the excess provision is written back in the year
the amounts are received, as permitted by the RBI.
2.Investments:
The transactions in all securities are recorded on a Settlement Date.
2.1 Classification
Investments are classified into three categories, viz. Held to Maturity (HTM), Available for Sale
(AFS) and Held for Trading (HFT) as per RBI Guidelines.
2.2 Basis of classification:
i. Investments that the Bank intends to hold till maturity are classified as Held to Maturity (HTM).
ii. Investments that are held principally for resale within 90 days from the date of purchase are
classified as Held for Trading (HFT).
iii. Investments, which are not classified in the above two categories, are classified as Available for
Sale (AFS)€.
iv. An investment is classified as HTM, HFT or AFS at the time of its purchase and subsequent
shifting amongst categories is done in conformity with regulatory guidelines.
v. Investments in subsidiaries, joint ventures and associates are classified as HTM
2.3 Valuation:
i. In determining the acquisition cost of an investment:
(a) Brokerage/commission received on subscriptions is reduced from the cost.
(b) Brokerage, Commission, Securities Transaction Tax (STT) etc., paid in connection with
acquisition of investments are expensed upfront and excluded from cost.
(c) Broken period interest paid / received on debt instruments is treated as interest expense/
income and is excluded from cost/ sale consideration.
(d) Cost is determined on the weighted average cost method for investments under AFS and HFT
category and on FIFO basis (first in first out) for investments under HTM category.
ii. Transfer of securities from HFT/AFS category to HTM category is carried out at the lower of
acquisition cost/ book value/market value on the date of transfer. The depreciation, if any, on such
transfer is fully provided for. However, transfer of securities from HTM category to AFS category

59
 is carried out on acquisition price/book value. After transfer, these securities are immediately
revalued and resultant depreciation, if any, is provided.
iii. Treasury Bills and Commercial Papers are valued at carrying cost.
iv. Held to Maturity category:
1. Investments under Held to Maturity category are carried at acquisition cost
unless it is more than the face value, in which case the premium is amortised over the period of
remaining maturity on constant yield basis. Such amortisation of premium is adjusted against
income under the head interest on investments.
b) Investments in subsidiaries, joint ventures and associates (both in India and abroad) are valued
at historical cost. A provision is made for diminution, other than temporary, for each investment
individually.
c) Investments in Regional Rural Banks are valued at carrying cost (i.e. book value).
v. Available for Sale and Held for Trading categories: Investments held under AFS and HFT
categories are individually revalued at the market price or fair value determined as per Regulatory
guidelines, and only the net depreciation of each group for each category (viz.,
(i) Government securities
(ii) Other Approved Securities
(iii) Shares
(iv) Bonds and Debentures
(v) Subsidiaries and Joint Ventures; and
(vi) others) is provided for and net appreciation, is ignored. On provision for depreciation, the
book value of the individual security remains unchanged after marking to market.
vi. In case of sale of NPA (financial asset) to Securitisation Company (SC)/ Asset Reconstruction
Company (ARC) against issue of Security Receipts (SR), investment in SR is recognised at lower
of: (i) Net Book Value (NBV) (i.e., book value less provisions held) of the financial asset; and
(ii) Redemption value of SR. SRs issued by an SC/ ARC are valued in accordance with the
guidelines applicable to non-SLR instruments. Accordingly, in cases where the SRs issued by the
SC/ ARC are limited to the actual realisation of the financial assets assigned to the instruments in
the concerned scheme, the Net Asset Value, obtained from the SC/ ARC, is reckoned for
valuation of such investments.
vii. Investments are classified as performing and nonperforming, based on the guidelines issued by
the RBI in the case of domestic offices and respective regulators in the case of foreign offices.
Investments of domestic offices become non-performing where:
(a) Interest/ installment (including maturity proceeds) is due and remains unpaid for more than 90
days.

60
 (b) In the case of equity shares, in the event the investment in the shares of any company is valued
at Rs.1 per company on account of the non availability of the latest balance sheet, those equity
shares would be reckoned as NPI.
(c) If any credit facility availed by an entity is NPA in the books of the Bank, investment in any of
the securities issued by the same entity would also be treated as NPI and vice versa.
(d) The above would apply mutatis-mutandis to Preference Shares where the fixed dividend is not
paid.
(e) The investments in debentures/ bonds, which are deemed to be in the nature of advance, are also
subjected to NPI norms as applicable to investments.
(f) In respect of foreign offices, provisions for NPIs are made as per the local
regulations or as per the norms of RBI, whichever is more stringent.
viii. Accounting for Repo/ Reverse Repo transactions (other than transactions under the Liquidity
Adjustment Facility (LAF) with the RBI):
(a) The securities sold and purchased under Repo/ Reverse Repo are accounted as Collateralized
lending and borrowing transactions. However, securities are transferred as in the case of normal
outright sale/ purchase transactions and such movement of securities is reflected using the Repo/
Reverse Repo Accounts and Contra entries. The above entries are reversed on the date of maturity.
Costs and revenues are accounted as interest expenditure/ income, as the case may be. Balance in
Repo Account is classified under Schedule 4 (Borrowings) and balance in Reverse Repo Account is
classified under Schedule 7 (Balance with Banks and Money at Call & Short Notice).
(b) Interest expended/ earned on Securities purchased/ sold under LAF with RBI is accounted for as
expenditure/ revenue.
ix. Market repurchase and reverse repurchase transactions as well as the transactions with RBI under
Liquidity Adjustment Facility (LAF) are accounted for as Borrowings and Lending transactions in
accordance with the extant RBI guidelines.
3.Loans/ Advances and Provisions thereon:
3.1 Loans and Advances are classified as performing and nonperforming, based on the guidelines/
directives issued by the RBI. Loan Assets become Non-Performing Assets (NPAs) where:
i. In respect of term loans, interest and/ or instalment of principal remains overdue for a period of
more than 90 days;
ii. In respect of Overdraft or Cash Credit advances, the account remains out of order, i.e. if the
outstanding balance exceeds the sanctioned limit/ drawing power continuously for a period of 90
days, or if there are no credits continuously for 90 days as on the date of balance-sheet, or if the
credits are not adequate to cover the interest debited during the same period;
iii. In respect of bills purchased/ discounted, the bill remains overdue for a period of more than 90
days;
iv. In respect of agricultural advances:
61
 1. for short duration crops, where the instalment of principal or interest remains
overdue for two crop seasons; and
(b) for long duration crops, where the principal or interest remains overdue for one crop season.
3.2 NPAs are classified into Sub-Standard, Doubtful and Loss Assets, based on the following criteria
stipulated by RBI:
i. Sub-standard: A loan asset that has remained nonperforming for a period less than or equal to 12
months.
ii. Doubtful: A loan asset that has remained in the substandard category for a period of 12 months.
iii. Loss: A loan asset where loss has been identified but the amount has not been fully written off.
3.3 Provisions are made for NPAs as per the extant guidelines prescribed by the regulatory authorities,
subject to minimum provisions as prescribed below:
Substandard Assets:
i. A general provision of 15% on the total outstanding;
ii. Additional provision of 10% for exposures which are unsecured ab-initio (i.e. where realisable
value of security is not more than 10 percent ab-initio);
iii. Unsecured Exposure in respect of infrastructure advances where certain safeguards such as escrow
accounts are available - 20%.
Doubtful Assets:
-Secured portion:
i. Upto one year - 25%
ii. One to three years - 40%
iii. More than three years - 100%
-Unsecured portion 100%
Loss Assets: 100%
3.4 In respect of foreign offices, the classification of loans and advances and provisions for NPAs are
made as per the local regulations or as per the norms of RBI, whichever is more stringent.
3.5 Advances are net of specific loan loss provisions, unrealised interest, ECGC claims received and
bills rediscounted.
3.6 For restructured/ rescheduled assets, provisions are made in accordance with the guidelines issued
by the RBI, which require that the difference between the fair value of the loans/ advances before and
after restructuring is provided for, in addition to provision for the respective loans/ advances. The
Provision for Diminution in Fair Value (DFV) and interest sacrifice, if any, arising out of the above, is
reduced from advances.
3.7 In the case of loan accounts classified as NPAs, an account may be reclassified as a performing
asset if it conforms to the guidelines prescribed by the regulators.
3.8 Amounts recovered against debts written off in earlier years are recognised as revenue in the year
of recovery.
62
3.9 In addition to the specific provision on NPAs, general provisions are also made for standard assets
as per extant RBI Guidelines. These provisions are reflected in Schedule 5 of the Balance Sheet under
the head Other Liabilities & Provisions - Others†and are not considered for arriving at the Net
NPAs.
3.10 Appropriation of recoveries in NPAs (not out of fresh/additional credit facilities sanctioned to the
borrower concerned ) towards principal or interest due as per the Bank’s extant instructions is
done in accordance with the following priority. a. Charges b. Unrealized Interest/Interest c. Principal
4. Floating Provisions:
The Bank has a policy for creation and utilisation of floating provisions separately for advances,
investments and general purposes. The quantum of floating provisions to be created is assessed at the
end of the financial year. The floating provisions are utilised only for contingencies under
extraordinary circumstances specified in the policy with prior permission of Reserve Bank of India.
5. Provision for Country Exposure:
In addition to the specific provisions held according to the asset classification status, provisions are
also made for individual country exposures (other than the home country). Countries are categorised
into seven risk categories, namely, insignificant, low, moderate, high, very high, restricted and off-
credit and provisioning made as per extant RBI guidelines. If the country exposure (net) of the Bank
in respect of each country does not exceed 1% of the total funded assets, no provision is maintained
on such country exposures. The provision is reflected in Schedule 5 of the Balance Sheet under the
Other liabilities & Provisions -Others.
6. Derivatives:
6.1 The Bank enters into derivative contracts, such as foreign currency options, interest rate swaps,
currency swaps, cross currency interest rate swaps and forward rate agreements in order to hedge on-
balance sheet/ off-balance sheet assets and liabilities or for trading purposes. The swap contracts
entered to hedge on-balance sheet assets and liabilities are structured in such a way that they bear an
opposite and offsetting impact with the underlying on-balance sheet items. The impact of such
derivative instruments is correlated with the movement of the underlying assets and accounted in
accordance with the principles of hedge accounting.
6.2 Derivative contracts classified as hedge are recorded on accrual basis. Hedge contracts are not
marked to market unless the underlying assets/ liabilities are also marked to market.
6.3 Except as mentioned above, all other derivative contracts are marked to market as per the
Generally Accepted Accounting Practices prevalent in the industry. In respect of derivative contracts
that are marked to market, changes in the market value are recognised in the Profit and Loss Account
in the period of change. Any receivable under derivatives contracts, which remain overdue for more
than 90 days, are reversed through Profit and Loss Account to Suspense Account Crystallised
Receivables. In cases where the derivative contracts provide for more settlement in future and if the
derivative contract is not terminated on the overdue receivables remaining unpaid for 90 days, the
63
positive MTM pertaining to future receivables is also reversed from Profit and Loss Account to
Suspense Account -Positive MTM.
6.4 Option premium paid or received is recorded in Profit and Loss Account at the expiry of the
option. The balance in the premium received on options sold and premium paid on options bought is
considered to arrive at Mark-to-Market value for forex Over-the-Counter (OTC) options
6.5 Exchange Traded Derivatives entered into for trading purposes are valued at prevailing market
rates based on rates given by the Exchange and the resultant gains and losses are recognized in the
Profit and Loss Account.
7. Fixed Assets, Depreciation and Amortisation:
7.1 Fixed Assets are carried at cost less accumulated depreciation/ amortisation.
7.2 Cost includes cost of purchase and all expenditure such as site preparation, installation costs and
professional fees incurred on the asset before it is put to use. Subsequent expenditure(s) incurred on
the assets put to use are capitalised only when it increases the future benefits from such assets or their
functioning capability.
7.3 The rates of depreciation and method of charging depreciation in respect of domestic operations
are as under:
7.4 In respect of assets acquired during the year (for domestic operations), depreciation is charged on
proportionate basis for the number of days the assets have been put to use during the year.
7.5 Assets costing less than Rs.1,000 each are charged off in the year of purchase.
7.6 In respect of leasehold premises, the lease premium, if any, is amortised over the period of lease
and the lease rent is charged in the respective year(s).
7.7 In respect of assets given on lease by the Bank on or before 31st March 2001, the value of the
assets given on lease is disclosed as Leased Assets under Fixed Assets, and the difference between the
annual lease charge (capital recovery) and the depreciation is taken to Lease Equalisation Account.
7.8 In respect of fixed assets held at foreign offices, depreciation is provided as per the regulations /
norms of the respective countries.
7.9 The Bank considers only immovable assets for revaluation. Properties acquired during the last
three years are not revalued. Valuation of the revalued assets is done at every three years thereafter.
7.10 The increase in Net Book Value of the asset due to revaluation is credited to the Revaluation
Reserve Account without routing through the profit and loss statement.
7.11 The Revalued Assets is depreciated over the balance useful life of the asset as assessed at the
time of revaluation.
8.Leases:
The asset classification and provisioning norms applicable to advances, as laid down in Para 3 above,
are applied to financial leases also.

9.Impairment of Assets:
64
Fixed Assets are reviewed for impairment whenever events or changes in circumstances warrant that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future Net Discounted Cash Flows
expected to be generated by the asset. If such assets are considered to be impaired, the impairment to
be recognised is measured by the amount by which the carrying amount of the asset exceeds the fair
value of the asset.
10.Effect of changes in the foreign exchange rate:
10.1 Foreign Currency Transactions
i. Foreign currency transactions are recorded on initial recognition in the reporting currency by
applying to the foreign currency amount the exchange rate between the reporting currency and the
foreign currency on the date of transaction.
ii. Foreign currency monetary items are reported using the Foreign Exchange Dealers Association
of India (FEDAI) closing (spot/ forward) rates.
iii. Foreign currency non-monetary items, which are carried at historical cost, are reported using
the exchange rate on the date of the transaction.
iv. Contingent liabilities denominated in foreign currency are reported using the FEDAI closing
spot rates.
v. Outstanding foreign exchange spot and forward contracts held for trading are revalued at the
exchange rates notified by FEDAI for specified maturities, and the resulting Profit or Loss is
recognised in the Profit and Loss account.
vi. Foreign exchange forward contracts which are not intended for trading and are outstanding on
the Balance Sheet date, are re-valued at the closing spot rate. The premium or discount arising at
the inception of such forward exchange contract is amortised as expense or income over the life of
the contract.
vii. Exchange differences arising on the settlement of monetary items at rates different from those at
which they were initially recorded are recognised as income or as expense in the period in which
they arise.
viii. Gains/ Losses on account of changes in exchange rates of open position in currency futures
trades are settled with the exchange clearing house on daily basis and such gains/ losses are
recognised in the Profit and Loss Account.
10.2 Foreign Operations: Foreign Branches of the Bank and Offshore Banking Units (OBU) have
been classified as Non-integral Operations and Representative Offices have been classified as Integral
Operations.
a. Non-integral Operations:
i. Both monetary and non-monetary foreign currency assets and liabilities including contingent
liabilities of non-integral foreign operations are translated at closing exchange rates notified by
FEDAI at the Balance Sheet date.
65
 ii. Income and expenditure of non-integral foreign operations are translated at quarterly average
closing rates notified by FEDAI.
iii. Exchange differences arising on investment in non integral foreign operations are
accumulated in Foreign Currency Translation Reserve until the disposal of the investment.
iv. The Assets and Liabilities of foreign offices in foreign currency (other than local currency of
the foreign offices) are translated into local currency using spot rates applicable to that country
on the Balance Sheet date.
b. Integral Operations:
i. Foreign currency transactions are recorded on initial recognition in the reporting currency by
applying to the foreign currency amount the exchange rate between the reporting currency and
the foreign currency on the date of transaction.
ii. Monetary foreign currency assets and liabilities of integral foreign operations are translated at
closing (Spot/ Forward) exchange rates notified by FEDAI at the Balance Sheet date and the
resulting Profit/ Loss is included in the Profit and Loss Account. Contingent Liabilities are
translated at Spot rate.
iii. Foreign currency non-monetary items which are carried at historical cost are reported using
the exchange rate on the date of the transaction.
11.Employee Benefits:
11.1 Short Term Employee Benefits:
The undiscounted amounts of short-term employee benefits, such as medical benefits which are
expected to be paid in exchange for the services rendered by employees, are recognised during the
period when the employee renders the service.
11.2 Long Term Employee Benefits:
i. Defined Benefit Plan
1. The Bank operates a Provident Fund scheme.
All eligible employees are entitled to receive benefits under the BanksProvident Fund scheme. The
Bank contributes monthly at a determined rate (currently 10% of employees basic pay plus eligible
allowance). These contributions are remitted to a Trust established for this purpose and are charged
to Profit and Loss Account. The Bank recognizes such annual contributions as an expense in the
year to which it relates. Shortfall, if any, is provided for on the basis of actuarial valuation.
b. The Bank operates Gratuity and Pension schemes which are defined benefit plans.
i) The Bank provides for gratuity to all eligible employees. The benefit is in the form of lump
sum payments to vested employees on retirement, or on death while in employment, or on
termination of employment, for an amount equivalent to 15 days basic salary payable for each
completed year of service, subject to a maximum amount of Rs.10 lacs. Vesting occurs upon
completion of five years of service. The Bank makes periodic contributions to a fund

66
 administered by Trustees based on an independent external actuarial valuation carried out
annually.
ii) The Bank provides for pension to all eligible employees. The benefit is in the form of
monthly payments as per rules to vested employees on retirement or on death while in
employment, or on termination of employment. Vesting occurs at different stages as per rules.
The Bank makes monthly contribution to the Pension Fund at 10% of salary in terms of SBI
Pension Fund Rules. The pension liability is reckoned based on an independent actuarial
valuation carried out annually and Bank makes such additional contributions periodically to the
Fund as may be required to secure payment of the benefits under the pension regulations.
c. The cost of providing defined benefits is determined using the projected unit credit method, with
actuarial valuations being carried out at each balance sheet date. Actuarial gains/ losses are
immediately recognised in the Profit and Loss Account and are not deferred.
ii. Defined Contribution Plans:
The Bank operates a New Pension Scheme (NPS) for all officers/ employees joining the Bank on or
after 1st August, 2010, which is a defined contribution plan, such new joinees not being entitled to
become members of the existing SBI Pension Scheme. As per the scheme, the covered employees
contribute 10% of their basic pay plus dearness allowance to the scheme together with a matching
contribution from the Bank. Pending completion of registration procedures of the employees
concerned, these contributions are retained as deposits in the Bank and earn interest at the same rate as
that of the current account of Provident Fund balance. The Bank recognizes such annual contributions
and interest as an expense in the year to which they relate. Upon receipt of the Permanent Retirement
Account Number (PRAN), the consolidated contribution amounts are transferred to the NPS Trust.
iii. Other Long Term Employee benefits:
a. All eligible employees of the Bank are eligible for compensated absences, silver jubilee award,
leave travel concession, retirement award and resettlement allowance. The costs of such long term
employee benefits are internally funded by the Bank.
b. The cost of providing other long term benefits is determined using the projected unit credit method
with actuarial valuations being carried out at each Balance Sheet date. Past service cost is immediately
recognised in the Profit and Loss Account and is not deferred.
11.3 Employee benefits relating to employees employed at foreign offices are valued and accounted
for as per the respective local laws/ regulations.
12. Taxes on income:
Income tax expense is the aggregate amount of current tax and deferred tax expense incurred by the
Bank. The current tax expense and deferred tax expense are determined in accordance with the
provisions of the Income Tax Act, 1961 and as per Accounting Standard 22 - Accounting for Taxes on
Income respectively after taking into account taxes paid at the foreign offices, which are based on the
tax laws of respective jurisdictions. Deferred Tax adjustments comprises of changes in the deferred
67
tax assets or liabilities during the year. Deferred tax assets and liabilities are recognised by
considering the impact of timing differences between taxable income and accounting income for the
current year, and carry forward losses. Deferred tax assets and liabilities are measured using tax rates
and tax laws that have been enacted or substantively enacted at the balance sheet date. The impact of
changes in deferred tax assets and liabilities is recognised in the profit and loss account. Deferred tax
assets are recognised and re-assessed at each reporting date, based upon managements judgment as to
whether their realisation is considered as reasonably certain. Deferred Tax Assets are recognised on
carry forward of unabsorbed depreciation and tax losses only if there is virtual certainty supported by
convincing evidence that such deferred tax assets can be realised against future profits.
13. Earnings per Share:
13.1 The Bank reports basic and diluted earnings per share in accordance with AS 20 -Earnings per
Share†issued by the ICAI. Basic Earnings per Share are computed by dividing the Net Profit after
Tax for the year attributable to equity shareholders by the weighted average number of equity shares
outstanding for the year.
13.2 Diluted Earnings per reflect the potential dilution that could occur if securities or other contracts
to issue equity shares were exercised or converted during the year. Diluted Earnings per Share are
computed using the weighted average number of equity shares and dilutive potential equity shares
outstanding at year end.
14.Provisions, Contingent Liabilities and Contingent Assets:
14.1 In conformity with AS 29, Provisions, Contingent Liabilities and Contingent Assets, issued by
the Institute of Chartered Accountants of India, the Bank recognises provisions only when it has a
present obligation as a result of a past event, and would result in a probable outflow of resources
embodying economic benefits will be required to settle the obligation, and when a reliable estimate of
the amount of the obligation can be made.
14.2 No provision is recognised for:
i. any possible obligation that arises from past events and the existence of which will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the Bank; or
ii. any present obligation that arises from past events but is not recognised because: a. it is not
probable that an outflow of resources embodying economic benefits will be required to settle the
obligation; or b. a reliable estimate of the amount of obligation cannot be made. Such obligations are
recorded as Contingent Liabilities. These are assessed at regular intervals and only that part of the
obligation for which an outflow of resources embodying economic benefits is probable, is provided
for, except in the extremely rare circumstances where no reliable estimate can be made.
14.3 Provision for reward points in relation to the debit card holders of the Bank is being provided for
on actuarial estimates.
14.4 Contingent Assets are not recognised in the financial statements.
68
15.Bullion Transactions:
The Bank imports bullion including precious metal bars on a consignment basis for selling to its
customers. The imports are typically on a back-to-back basis and are priced to the customer based on
price quoted by the supplier. The Bank earns a fee on such bullion transactions. The fee is classified
under commission income. The Bank also accepts deposits and lends gold, which is treated as
deposits/ advances as the case may be with the interest paid/ received classified as interest expense/
income. Gold Deposits, Metal Loan Advances and closing Gold Balances are valued at available
Market Rate as on the date of Balance Sheet.
16. Special Reserves:
Revenue and other Reserve include Special Reserve created under Section 36(i)(viii) of the Income
Tax Act, 1961. The Board of Directors of the Bank have passed a resolution approving creation of the
reserve and confirming that it has no intention to make withdrawal from the Special Reserve.
17. Share Issue Expenses:
Share issue expenses are charged to the Share Premium Account.

AUDITOR REPORT

69
March 2017
Report on the Standalone Financial Statements
1. We have audited the accompanying standalone financial statements of State Bank of India as at
March 31 2017, which comprises the Balance Sheet as at March 31, 2017, the Profit and Loss
Account and the Cash Flow Statement for the year then ended, and a summary of significant
accounting policies and other explanatory information. Incorporated in these standalone financial
statements are the returns of
i) The Central Offices, 14 Local Head Offices, Global Market Group, International Business
Group, Corporate Accounts Group (Central), Mid-Corporate Group (Central), Stressed Assets
Management Group (Central) and 42 branches audited by us;
ii) 9,873 Indian Branches audited by other auditors;
iii) 53 Foreign Branches audited by the local auditors. The branches audited by us and those
audited by other auditors have been selected by the Bank in accordance with the guidelines issued
to the Bank by the Reserve Bank of India. Also incorporated in the Balance Sheet and the Profit
and Loss Account are the returns from 8,200 Indian Branches (including other accounting units)
which have not been subjected to audit. These unaudited branches account for 3.86 % of
advances, 15.50% of deposits, and 4.90 % of interest income and 14.51 % of interest expenses.
Managements Responsibility for the Standalone Financial Statements
2. The Banks management is responsible for the preparation of these standalone financial
statements that give a true and fair view of the financial position, financial performance and cash
flows of the Bank in accordance with the requirements of the Reserve Bank of India, the
provisions of the Banking Regulation Act, 1949, the State Bank of India Act, 1955 and
recognised accounting policies and practices, including the Accounting Standards issued by the
Institute of Chartered Accountants of India (ICAI). This responsibility of the management
includes the design, implementation and maintenance of internal controls and risk management
systems relevant to the preparation of the standalone financial statements that are free from
material misstatement, whether due to fraud or error. In making those risk assessments, the
management has implemented such internal controls that are relevant to the preparation of the
standalone financial statements and designed procedures that are appropriate in the circumstances
so that the internal control with regard to all the activities of the Bank is effective.
Auditors Responsibility
3. Our responsibility is to express an opinion on these standalone financial statements based on
our audit. We conducted our audit in accordance with the Standards on Auditing issued by the
Institute of Chartered Accountants of India. Those Standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the
standalone financial statements are free from material misstatement.
4. An audit involves performing procedures to obtain audit evidence about the amounts and
70
disclosures in the standalone financial statements. The procedures selected depend on the auditors
judgment, including the assessment of the risks of material misstatement of the standalone
financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the Banks preparation and fair presentation of the standalone
financial statements in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the entitys internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of the accounting estimates made by management, as well as evaluating the
overall presentation of the standalone financial statements.
5. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
6. In our opinion, as shown by books of the Bank, and to the best of our information and
according to the explanations given to us:
(i) the Balance Sheet, read with the significant accounting policies and the notes thereon is a full
and fair Balance Sheet containing all the necessary particulars, is properly drawn up so as to
exhibit a true and fair view of state of affairs of the Bank as at March 31, 2017 in conformity with
accounting principles generally accepted in India;
(ii) the Profit and Loss Account, read with the significant accounting policies and the notes
thereon shows a true balance of profit, in conformity with accounting principles generally
accepted in India, for the year covered by the account; and
(iii) the Cash Flow Statement gives a true and fair view of the cash flows for the year ended on
that date.
Report on Other Legal and Regulatory Requirements
7. The Balance Sheet and the Profit and Loss Account have been drawn up in Forms and
respectively of the Third Schedule to the Banking Regulation Act 1949 and these give
information as required to be given by virtue of the provisions of the State Bank of India Act,
1955 and regulations there under.
8. Subject to the limitations of the audit indicated in paragraphs 1 to 5 above and as required by
the State Bank of India Act, 1955, and subject also to the limitations of disclosure required there
in, we report that:
a) We have obtained all the information and explanations which to the best of our knowledge and
belief, were necessary for the purposes of our audit and have found them to be satisfactory.
b) The transactions of the Bank, which have come to our notice, have been within the powers of
the Bank.
c) The returns received from the offices and branches of the Bank have been found adequate for

71
the purposes of our audit.
9. In our opinion, the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement
comply with the applicable accounting standards.

Q.1)What would be the Audit Procedure (In Brief) in case of Bank Branch Statutory Audit ?
 Preparation of Audit Plan Work Allocation Reading of Closing Circular, Bank policy,
72
 Delegation of Authority Have a look on LFAR points, List of Certificates which requires to
sign, Various system generated reports – Exception report, Exceeding report, SMA II report,
etc.
 Reading and noting the points from Concurrent Audit Report, Inspection Report, RBIA
report, System Audit Report, Last year’s financial statements.
 Verification of GLA with FormA and FormB.
 Selection of Advances according to Portfolio of Branch (Needs to ask for facility-wise
jotting).
 It should be sample basis with coverage of all the products – While checking the advances
go through the detail current file of communication, Latest Annual financials, Stock Audit
Report, Credit Audit Report, Credit rating, CIBIL report, Valuation report of Collateral,
Search Report, Mortgage papers, etc.
 Filling of Checklist is preferable according to facility.
 Verification of KYC norms for the accounts opened during the audit period.
 Stationery Verification – DD, Cheque books, FD, Lockers, Stamps ,etc. Cash and ATM cash
(if any) verification.
 FormA - FormB head wise analysis with last year comparison and if variation is more than
5%-10% then reason for the same.
 FormB – On Test basis vouchers-supporting of the expenses needs to verify. Interest
Verification – CC, OD, TL, RD, etc.
 Commission Verification of DD, BG, LC, etc. If AD Branch then foreign exchange related
transactions needs to verify with proper supporting – Preferably checklist of the same needs
to fill. Based on the above audit needs to fill up the LFAR and verify the Certificates.

Q.2)Verify the Provisioning on advances as per the RBI guidelines or not ?

 Verify the classification of advances – Priority, Others, Staff, etc Verify the Basel II – III
report, Verify the Risk Weightage and cross tally the same with total advances.
 Verify the transactions on test basis through black box testing.
 Form A Verification – Long outstanding entries, age-wise break ups, subsequent clearance of
parking entries (if any), grouping of advances, etc.

Q.3)What are the Category of Advances and Provisioning Norms for Advances ?
 Classification of Advances –
i) Standard Assets ii) Sub- Standard Assets iii) Doubtful Assets iv) Loss Assets Provisioning Norms
(In General) – Provisioning are on the basis of Borrower wise and not on the facility wise: On
Standard assets - The provisioning requirements for all types of standard assets stand as below.
Banks should make general provision for standard assets at the following rates for the funded
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 outstanding on global loan portfolio basis:
1. Farm Credit to agricultural activities and Small and Micro Enterprises (SMEs) sectors
at 0.25% (for medium enterprises 0.40%)
(b) Advances to Commercial Real Estate (CRE) Sector at 1.00 %
(c) Advances to Commercial Real Estate – Residential Housing Sector (CRE - RH) at 0.75%
(d) Restructured Standard Assets – 5.00%
(e) All other loans and advances not included in (a) (b) and (c) above at 0.40 per cent.
On Sub-Standard Assets – In General 15% and on unsecured portion (if any) then additional
provision of 10%
On Doubtful Assets – On Unsecured portion 100% and on secured portion as follows:- Period for
which the advance has remained in ‘doubtful’ category Provision requirement (%)
-Up to one year 25
-One to three years 40
-More than three years 100
On Loss Assets – 100%
Q.4)What is the provision requirement for Restructured Advances?
 Restructured advances is a weak advances but weakness is of for the temporary nature. And on
the basis of probable inflow bank has restructured the facilities. Provision for above type of
advances is 5.00% but restructured advances turn into the Non-Performing Asset then the date of
NPA should be original date of NPA before restructuring. If any advances classified as NPA then
non served interest from the date of NPA should be reversed by the bank.

Q.5)What is the meaning of Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), Repo Rate,
Reverse Repo Rate, Bank Rate?
 SLR: Statuary liquidity ratio means the amount of liquid assets such as precious metals (gold) or
other approved securities that a financial institution must maintain as reserves other than cash.
Objectives of SLR is to restrict expansion of the bank credit: To increase investment of banks in
govt. securities. To ensure solvency of banks.

 CRR: CRR refers to the funds that the banks have to keep with the RBI. If the central banks
decide to increase the CRR, the available amount with the banks comes down. The RBI uses the
CRR to drain out the excessive money from the system.

 Repo Rate: repo rate is the rate at which the central bank (RBI) lends the money to the
commercial banks to meet the minimum statuary requirement of the day. Repo rate is charged on
money lend by central banks to commercial banks for short term purposes. A Reduction in repo
rate helps the banks to get the funds at a lower rate from RBI.

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 Reverse repo rate: Reverse Repo Rate is the rate at which the commercial bank lends the money
to the central bank (RBI). Banks are always happy to lend money to the RBI since their money is
in safe & secure hands. It is also a tool used by the RBI to drain out the excess money out of the
Banking System.

 Bank Rate: Bank Rate refers to the rate which the central bank charges on the loans & advances
to the commercial banks. Whenever the banks have shortage of funds, they can typically borrow
from the central banks based on the monetary policy of the country.

Findings and Discussions

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The comments given by the respondent when analysing the results you see

 Audit, helps on the banks process in improving their process to make it more accurate.

 The undeniable role of the audit is an added value process for documentation and management.

 The follow-up process acts as incentive as they have to comply with audit query as early as
possible.

 Audit helps on improvement of the internal control system as there are many critical areas which
can create income leakage or can make asset NPA.

 The key documents selected while auditing bank are loan documents, cash register, BGL & CGL
Book, locker register, Bank Key Register,etc

 The internal auditors are trained to audit soft controls.

 The selection of documents to be audited is not enough representative to measure activity

performance as there is always some limitation in audit work as per RBI Guidelines and CARO
2016.

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Chapter 8

Conclusion
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 The project concluded that given the complexity and development of Indian banking sector,the
overall level of compliances with the standards and codes is of high order. This project gives the
correct ideas about how the major areas can be found by way of effective auditing system i.e.
Errors, frauds, manipulations, etc. From this auditor gets the clear idea to recommend on the banks
position. Project also contain that how to conduct audit of the banks, what are the various
procedures throgh which audit audit of banks should be done.
The importance of the financial system in an economy can hardly be overstated, and the banking
industry remains at the core of the financial system, even in countries where its credit role has
diminished relative to other financial sectors. Recent changes in the nature of banking, and the
frequency in the past couple of decades of costly banking crises around the world, have only
heightened the interest of policy makers and industry participants in the effective regulation and
supervision of banks.
From auditing point of view,there is proper follow up of work done in every organization whether it
is a banking company there is no misconduct of transactions is taken places for that purpose the
Auditing is very important aspect in todays economic scenario from company and point of view.

 Bibliography
Books
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 Ainapure ; Advanced Financial Accounting ; Manan Prakashan
 Ainapure ; Introduction to Auditing ; Manan Prakashan

Websites
 www.sbi.co.in
 www.goodreturns.in
 www.icai.org

Annexure :
Questionnaire
No. Questions Yes/No Comments
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1 Do you think audit helps on the
banks process improvement?
2 Do you consider that audit is an
added value process in the SBI
bank?
3 Do you consider the follow-up
process as an incentive to close the
open & partially done actions?
4 SBI bank follows the audit
procedure laid down by the RBI or
different procedure is followed?
5 Do you think that audit helps on
the improvement of the internal
control system of the auditees of
sbi bank?
6 What are the key documents to be
selected at sbi bank for auditing?
(comment)
7 Are internal auditors really trained
to audit soft controls?
8 Do you think that the selection of
documents to be audited is enough
representative to measure your
activity performance?
9 Do SBI bank staffs answer
properly while auditing?
10 Is there a difference between audit
of SBI bank and other private
banks?

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