Ref. No.NB.DoS.HO.POL/ 478 /J-1/2011-12

Circular No 96/DoS 07 ./2011

18 May 2011

The Managing Director, All State Cooperative Banks

The Managing Director / General Manager /Chief Executive OfficerAll District Central Cooperative Banks

Dear Sir,

Internal Checks and Control Systems in Banks

A sound system of internal checks and control is a pre-requisite for healthy growth of banking system. The methods of operations adopted by banks have, therefore, to be in conformity with the standardised procedures and practices evolved over long years of experience not only to obviate irregularities of omissions and commissions likely to arise in the course of daily business but also to prevent wilful perpetration of frauds by employees and customers. The importance of a sound system of internal checks is more crucial for banking institutions as they are the repositories of the savings of the public and have necessarily to instill confidence in the public mind for attracting more deposits which provide them with resources for dispensation of credit to the needy clientele. With the increase in volume of business and banking transactions as also complex banking instruments and systems along with the autonomy given under the reforms package, the internal control system has to become more extensive addressing various risks faced by the banks.

2. However, during the course of statutory inspection conducted by NABARD, a number of deficiencies were observed in internal control system of some banks. On the other hand, some banks were found to have adopted good practices which had contributed to better control systems. In order to discuss the deficiencies and possible remedial measures that may be adopted, as also to create a platform to share the best practices adopted by some of the banks, we had organized a series of Seminars for the Chief of Internal Inspection and Audit Departments of State and Central Cooperative Banks on regional basis. The first such Seminar was held at Solan, Himachal Pradesh on 15 & 16 December 2010 wherein officer of SCBs and select DCCBs from Haryana, Punjab, H.P., U.P, Jammu & Kashmir, Uttarakhand, MP and 2 Union Territories of New Delhi and Chandigarh participated. This was followed by second Seminar at Kolkata on 10 & 11 January 2011 involving banks officers from SCBs and select DCCBs from Assam, West Bengal, Nagaland, Andaman & Nicobar, Meghalaya, Mizoram, Orissa,

Bihar and Arunachal Pradesh. The last seminar held at Mangalore, Karnataka on 27 & 28 January 2011 was attended by officers from SCBs and select DCCBs from Karnataka, Tamilnadu, Kerala, Andhra Pradesh, Maharashtra and Gujarat States.

3. The seminars focused on various issues and deliberated at length, the measures to further strengthen the checks and control systems in the banks. Senior executives from NABARD HO guided the deliberations. Dr. K.G.Karmakar, Managing Director, NABARD and Shri Amaresh Kumar, Executive Director of NABARD were also present in the seminar at Kolkata to guide the deliberations and address the participants. Guest lectures from Chartered Accountants representing Institute of Chartered Accountants of India (ICAI) and from Commercial Banks handled sessions on Audit and Risk Management in Banks respectively.

4. During the course of the above seminars, the participants made presentations on ‘Best Practices’ adopted in their banks for sound internal checks and control systems which are indicated in Annexure-I. Possibilities of adopting the same with suitable modifications wherever necessary may be explored. Similarly, common deficiencies observed by NABARD during the inspection and discussed in the above seminars, are indicated in Annexure-II. It may please be ensured that such deficiencies, if existed in your bank, may be rectified immediately. Participants also discussed in groups, various emerging issues on internal checks and made certain suggestions to improve the systems and controls which are indicated in Annexure-III for information and taking necessary action.

5. We shall be glad, if you will please bring the contents of this circular and information contained in the Annexures to the notice of the officers attached to the Internal Audit, Internal Inspection Departments of your bank and ensure that the deficiencies are rectified, best practices are adopted and suggestions implemented.

6. Action taken in this regard may please be advised to our Regional Office

concerned.

Yours faithfully,

Sd/-(G.C.Panigrahi)Chief General Manager

Annexure-IRegional Seminars for Chief of Internal Inspection / Audit Dept. of SCBs, DCCBs – 2010-11

Best Practices adopted by some SCBs/DCCBs in Internal Checks and Control Systems

Andhra Pradesh State Coop. Bank (APCOB)

• Grading of the branches based on Audit ratings.

• Progress in obtaining KYC norms in respect of old account holders

verified during inspection.

• Policy changes are discussed in senior officers’ group meetings before

implementation.

Karnataka State Cooperative Apex Bank (KSCAB)

• Inspection Manuals are in place to ensure standardised practices

• Annual 100% Jewel loan account verification.

• Re-appraisal of pledged jewels to satisfy quality of jewels pledged.

• Surprise visit of branches by designated senior officers.

• Inspection of branches conducted on annual basis whereas concurrent

audit is done on quarterly basis.

Tamil Nadu State Coop. Bank (TNSCB)

• Risk Management Committee formed.

• 100% Jewel loan account verification.

• Workshops conducted for jewel appraisers.

• Prepared manual on inspection & audit, Credit & recovery and circulated

among the branches

• Concurrent Audit done by department.

• Motivational Seminar conducted for Departmental auditors consequent

upon statutory audit being conducted by Chartered Accountant after

Vaidynathan Committee recommendation.

• Conducting annual workshops for Inspectors/Auditors with NABARD

support.

• Moving towards CBS, 39 out of 46 branches under CBS

• Customer Service Committee to guide the customers.

• System audit done by CISA

• Disaster Recovery Centre located at Bengaluru.

Maharashtra State Coop. Bank (MSCB)

• CBS policy approved by Board.

• Foreign Exchange facility provided to customers

• Internal Audit / Inspection Department headed by GM

• Pre audit of payments at HO.

• Quarterly audit of ROs.

• surprise cash verification

• Concurrent audit

• Annual review of each department by Board.

• Observations of internal audit placed before Board.

• Audit sub committee constituted and Risk management policy framed

Kottayam DCCB

• Inspection done by inspection dept whereas audit is done by Internal

Audit dept.

• Surprise inspection by GM.

• 100% verification of gold loan on annual basis

Thiruvannamalai DCCB

• Jewel loan verification by committee constituting of credit manager and

appraiser not connected with the branch.

Tumkur DCCB

• Jewel loan appraised by other than branch appraiser on regular basis to

satisfy quality

• DDs pending register maintained and regularly followed up

Hyderabad DCCB

• Polythene bags introduced for keeping jewels pledged and hologram seal

affixed.

• DDs issued by all branches are reconciled by HO.

• Inspection reports on perforated sheets to enable on the spot handing over

of the reports immediately on completion of the inspection.

• Branch inspections conducted on half yearly basis and PACS inspection

on quarterly basis.

Tanjavur DCCB

• Zonal Office conducts the inspection of branches

• 100% verification of Gold loans and other documents.

• CRR/SLR monitored on daily basis.

• Deposit mobilisation and recovery camps organised.

Ananthapur DCCB

• Nodal officers monitoring compliance and other aspects on monthly basis

• Jewels auctioned after due date

Thiruvananthpuram DCCB

• Vigillance inspection verifies cash and gold.

• Surprise inspection in place

Ratanagiri DCCB

• Inspection conducted on half yearly basis

• Verification of 100% dormant accounts to see any unauthorised

transactions carried out.

• 100% verification of loan documents.

Kolhapur DCCB

• 100% interest receivable checked to arrest income leakage

• Quarterly inspections in respect of branches and annually in respect of

PACS.

Karnataka CCB, Dharwad

• Recovery camps organised

• President takes initiative in recovery of loans.

• Retired employees hired on contract basis for implementation of

DAP/MoU

• Concurrent audit completed in respect of 31 branches out of 35.

Madurai DCCB

• Separate team for inter branch reconcilliation

• Recruitment of 100 fresh graduates.

• Manual for inspection in place

Surat DCCB

• Snap audit

• Surprise visits by senior officers from HO

• Account opening form (electonic) devised in such way that automatically

KYC norms complied.

• CBS implemented.

• Inter branch transaction module developed and implemented

• Exception reports obtained and scrutinised

• Branch managers are required to appear before Audit Committee in case

of delay in submission of compliance

• Senior officers visit borrowers availing loan beyond `.25 lakhs

Ernakulam DCCB

• ISO certified bank

• 35 ATMs.

• Mobile bank and floating bank (Bank on wheel & waves)

• Core banking since 2004. (Finacle Infosys supported)

• Inspection manual in place

• Check list for inspection

• Surprise and detailed inspection

• system audit

• Checklist for auditors

• Inspection of HO Depts

• vigilance and Audit committee established.

Chennai DCCB

• Weekly visits by Chairman

• Cash verification

• Time barred loans verified.

• Jewel squad for 100% verification of gold loans over one year.

West Godavari DCCB

• Nodal officers for verification of various types of loans

• 100% verification of gold loan accounts

• Chartered accountant appointed as one of the Director on the Board.

(Beed, Akola, Bagalkot, Chikmagalur, Hassan, Osmanabad, Surendranagar,

Chittoor, Virudhnagar and E Godavari- )

Assam SCB

• Introduced Two Tier check system, by Internal Auditors and By Inspecting

Officers

• Audit Committee formed.• GM’s Committee formed to streamline and rectify the deficiencies in re-

spect of balancing of books of account and release salary of branch staff only on submission of monthly statement of balancing of books by the branches.

• A separate cell for reconciliation of Inter-branch account and demand draft account was constituted.

• Introduced Snap Inspection of selected branches.

Meghalaya SCB

• All the branches were audited on yearly basis. • Vigilance Cell constituted. • Conducted surprised inspections.• Inspection Reports, Surprise inspection reports and audit reports were

scrutinised at HO and put to BOD.

Nagaland SCB

• Risk Management Committee constituted.• Imbalances in the books of accounts at various branches have been

blocked under common head “Un-reconciled Balance” as a result further creation of imbalances has been arrested.

• Adopted Comprehensive Report Transactions (CRT), a daily statement en-compassing entire transaction in the branch. It is one of the Chief internal

check tool through which HO is able to conduct off site control over the branches.

• BOD review all the matters relating to internal checks and control of the bank with emphasis on balancing of all books of account.

Orissa SCB

• Statutory Audit by CA.• Concurrent audit by Departmental auditors.• Risk Management Committee was constituted.• Audit Committee was constituted with CA as a member.• Inter-branch reconciliation cell at HO.• Loan manual revised with the help of NABCONS• ATMs in all the places

Burdwan CCB

• Implemented CBS• ALM implemented• Vigilance Cell constituted• Inspection Reports reviewed by CEO and put up to BOD.• Monthly reconciliation system is in vogue.• Introduction of KYC/AML policy• Statutory audit by Chartered Accountants.• Concurrent audit by Departmental auditors.

Murshidabad CCB

• Fully computerised branches.• Audit sub-committee and Reconciliation committees were constituted.• Surprise visit to branches.• NPA below 20%.

Sambalpur DCCB

• Reconciliation done on computerised system.• Audit by CA• As on 31 March 2010, CRAR 6.9% and no CRR/SLR default.

DCCB, Dhanbad (Jharkhand)

• Concurrent audit by Departmental auditors.• Statutory audit by CA.

Mayurbhanj CCB

• Daily posting of the ledgers, verification of entries by officers.• Books are periodically balanced and subsidiary balancing ledger is main-

tained.• Concurrent audit carried out in larger branches.• Vigilance cell and fraud monitoring arrangement.

• Fully computerised with CBS at all branches by June 2011.

Uttar Pradesh SCB• Duplicity of areas between audit and inspection avoided.• Concurrent Audit – Self - Audit by branches introduced• Section 11(1_ non compliant banks’ performance reviewed quarterly by

Monitoring Cell• NABARD/RBI stringent action lead to improved functioning

Haryana SCB• For every 10 branches of DCCB Inspection one Asstt. Manager from Apex

Bank• Branches of SCB done in Panchkula and Haryana• Income & Expenditure vouchers audited yearly• Concurrent Audit by CA• Inoperative accounts operation monitored

Himachal Pradesh SCB• Check list on each item divided and given to all internal auditors• Audit and Inspecvtion Manual prepared• Suspense Account, Impress account verified• Cluster incharges to monitor branches• Information system guidelines being prepared

Punjab SCB• Statutory audit by CA• Internal Audit by Chief of audit of state Government yearly• Half-Yearly internal inspection• System Audit guidelines under preparation

Rajasthan SCB• Internal Audit by Chartered Accountants – Outsourced – quarterly

Nainital DCCB• For System Audit, information Technology Act 2000, guidelines are being

followed• Separate officer for RTI Act areas

Ambala DCCB• Vigilance Cell undertakes cash verification and examine complaints• Chartered Accountants adopting LFAR as per NABARD guidelines• Chartered Accountant report is placed before the Audit Committee

Ujjain DCCB• For internal Inspections, Branch Managers are interchanged six-monthly

Dhar DCCB• Book balancing done in 17 out of 29 branches

• Three member committee for interest verification – done at branches at six monthly interval

• Inter branch reconciliation 100 %

Jogindra DCCB• Prepared check list for Computer Inspection• Fully computerized (TBS)

Morena DCCB• Inter bank and inter branch reconciliation upto date• Savings bank account forms 46% of total Deposits• Adoption of uniform dress code• Behavioral changes of employees • Having own CEO as per “fit and Proper Criteria”

Jaipur DCCB• Vigilance cell to cover even PACS since 1990• No frauds• Quarterly internal audit outsourced – conducted by CAs

Faizabad DCCB• Audit Committee meet once in 45 days• Pending entries minimized due to regular review by way of reconcilliation • Internal Inspection of 4 branches per month by IAD

Annexure-II

Regional Seminars for Chief of Internal Inspection / Audit Dept. of SCBs, DCCBs – 2010-11

Common deficiencies observed in internal checks and control systems in some SCBs/DCCBs

a) Arrears in Internal Inspection /Audit of branches were observed in many

banks.

b) There was no separate Inspection/Internal Supervision Department in a

few banks.

c) Audit Committee Risk Management Committee, Fraud Risk Group and

Vigilance Cells were not constituted in some banks. In some other banks,

the committees were not effectively functioning.

d) All audit/inspection reports along with compliance thereto were not

placed before the Board of Directors. Major findings of audit, the

rectification progress and the strategies to address the deficiencies should

also be placed before the Board of Directors.

e) Proper maintenance of the books of accounts, regular balancing and

reconciliation was not ensured.

f) A number of frauds had occurred due to weak internal checks systems

Incidence of fraud, etc., should be minimised by taking recourse to

various preventive, monitoring and management measures as advised

vide our Circular No.215/DoS.34/2006 dated 15 December 2006.

g) There was delay in some cases, in furnishing various internal returns by

branches, statutory returns (including Off-Site Surveillance) by banks

h) As per the extant RBI instructions, all the unreconciled and outstanding

inter-branch accounts for more than six months would have to be fully

provided. However, in some banks there was no system of monitoring and

classification of inter-branch accounts age-wise to ensure making

necessary provision.

i) While computerisation is fast picking up in many banks, various

safeguards for safe back-up of data, consistent and reliable data

generation, etc., was not ensured. Disaster Recovery Management and

Business Continuity Planning needed much to be desired.

j) The banks were not taking measures for proper information-sharing

systems with Regulator/Supervisor, banks and customers, display of

information at branches. The focus on MIS, disclosure, transparency in

practices, etc..

k) There were lacuna in ensuring that delegated powers are excercised at

various levels scrupulously as authorised by the Competent Authority.

l) System-Audit of computerized branches was not effective resulting in

perpetration of frauds.

m) There was no system of verification of cash by surprise.

n) No comprehensive customer acceptance policy was in place and customer

identification procedures were not followed as stipulated in the various

instructions / guidelines issued by RBI and NABARD on KYC/AML.

o) Banks were not prompt in submission of Cash Transaction Reports (CTR),

Suspicious Transaction Reports (STR) and Counterfeit Currency Reports

(CCR) as per the PML Act RBI / NABARD instructions.

p) Principal Officer was not nominated in many banks for ensuring proper

implementation and reporting under AML.

Annexure-III

Regional Seminars for Chief of Internal Inspection / Audit Dept. of SCBs, DCCBs – 2010-11

Suggestions made by Groups to improve internal checks and control systems

(1) Reconciliation of Inter-branch accounts – ways and means to minimize pending entries, possibilities of freezing the pending entries.

• Wrong vouching to be avoided, checking of vouchers to be tightened• More frequent meetings of member banks to reconcile pending inter-bank

entries• Deployment of retired bank staff for reconciliation • Freezing of accounts should not be resorted to in the normal course • Top management to review progress on monthly basis• Time frame of 1 year should be fixed for reconciliation.• There should be a proper system of handing over and taking over of old

records and they should be properly preserved • Due to computerization, freezing is resorted to as on the date of

computerization. All out efforts to be made to reconcile freezed accounts

(2) Statutory Audit – emerging issues

• Audit by Chartered Accountants is reduced cost of audit. Hence may be continued

• There is a need for a separate audit report for large and medium size branches on the lines of statutory audit of the bank

• Rating of branches may be undertaken • Pre-audit meeting with CEO and furnishing all circulars to auditors is

necessary to ensure better results • At present auditors undertaken audit of cooperative banks on the basis of

guidelines for audit of commercial banks. Separate guidelines for audit of cooperative banks is required

• Separate workshops may be conducted by NABARD / Apex Banks for auditors

• Percentage of verification of NPA in the branches should be fixed by the management and communicated to the auditor

• Close coordination and interaction between statutory auditors and internal auditors to be ensured.

• The present audit rating system is in order. However A+ rating may also be introduced

(3) Frauds in cooperative banks – preventive and punitive measures – data building / MIS and reporting of frauds to NABARD

• Regular job rotation should be ensured • Reports generated at branches and different HO departments be analysed

and any abnormality should be checked and monitored immediately • All important registers should be checked by internal auditor/inspector • Interaction with staff/officers individually by the audit team and track

suspicious behaviour• Many banks have developed structured inspection format. The guidelines

issued by NABARD may be used to revisit the same • Fraud prone areas such as inoperative accounts, unclaimed deposit

accounts, inter-branch adjustment accounts, documentation of loans etc., should receive special attention of internal auditor

• Modus operandi of frauds in own bank as well as in other banks should be discussed in branch managers’ meetings

• If any major policy violation is observed in internal inspection/audit, the same should reported to top management immediately by means of a special note

• Branch returns should be streamlined and duplication avoided in the wake of introduction of CBS

• Banks to formulate their own compendium for prevention of frauds • Vigilance cell to be constituted wherever not done

(4) Compliance to statutory provisions

• In respect of branches other than CBS, constant monitoring at HO is required

• Due date register is to be maintained and followed up • Submission of returns should form part of branch review and rating

system • Penal action may be initiated against recalcitrant branch managers • Status report on compliance to various statutory provisions should be

placed the Board in every meetings

Ref. No.NB.DoS.HO.POL/ /J-1/2011-12 April 2011 Circular No…….DoS……./2011

The Chairman All Regional Rural Banks

Dear Sir,

Internal Checks and Control Systems in Banks

A sound system of internal checks and control is a pre-requisite for healthy growth of banking system. The methods of operations adopted by banks have, therefore, to be in conformity with the standardised procedures and practices evolved over long years of experience not only to obviate irrgularities of omissions and commissions likely to arise in the course of daily business but also to prevent wilful perpetration of frauds by employees and customers. The importance of a sound system of internal checks is more crucial for banking institutions as they are the repositories of the savings of the public and have necessarily to instill confidence in the public mind for attracting more deposits which provide them with resources for dispensation of credit to the needy clientele. With the increase in volume of business and banking transactions as also complex banking instruments and systems, the internal control system has to become more extensive addressing various risks faced by the banks.

2. However, during the course of statutory inspection conducted by NABARD, a number of deficiencies were observed in internal control system of some banks. On the other hand, some banks were found to have adopted good practices which had contributed to better control systems. In order to discuss the deficiencies and possible remedial measures that may be adopted, as also to create a platform to share the best practices adopted by some banks, we had organized a series of Seminars for the Chief of Internal Inspection and Audit Departments of Regional Rural Banks on regional basis. The first such Seminar was held at Chennai on 20 & 21 January 2011 in which the Chief of Internal Inspection / Audit Departments of RRBs from Andhra Pradesh, Karnataka, Kerala, Tamilnadu, Maharashtra, Gujarat, Orissa and Jharkhand participated. This was followed by second Seminar at Lucknow on 27 & 28 January 2011 in respect of RRBs from Uttarakhand, Madhya Pradesh, Uttar Pradesh, Jmmu & Kashmir, Chhattisgarh, Rajasthan, Punjab & Haryana. The third seminar held at Bolpur on 10 & 11 February 2011 was attended by officers from RRBs operating in Assam & North Eastern Region, West Bengal, Bihar and Jharkhand States.

3. The seminars focused on various issues and deliberated at length, the measures to further strengthen the checks and control systems in the banks.

Senior executives from NABARD HO guided the deliberations. Shri Amaresh Kumar, Executive Director of NABARD was also present in the seminar held at Chennai and Lucknow to guide the participants. Guest lectures from Chartered Accountants representing Institute of Chartered Accountants of India (ICAI) and from Commercial Banks handled sessions on Audit and Risk Management in RRBs respectively.

4. During the course of the above seminars, the participants made presentations on ‘Best Practices’ adopted in their banks for sound internal checks and control systems which are indicated in Annexure-I. Possibilities of adopting the same with suitable modifications wherever necessary may be explored. Similarly, common deficiencies observed by NABARD during the inspection and discussed in the above seminars, are indicated in Annexure-II. It may please be ensured that such deficiencies, if existed in your bank, may be rectified immediately. Participants also discussed in groups, various emerging issues on internal checks and made certain suggestions to improve the systems and controls which are indicated in Annexure-III for information and taking necessary action.

5. We shall be glad, if you will please bring the contents of this circular and information contained in the Annexures to the notice of the officers attached to the Internal Audit, Internal Inspection Departments of your bank and ensure that the deficiencies are rectified, best practices adopted and suggestions implemented.

6. Action taken in this regard may please be advised to our Regional Office

concerned.

Yours faithfully,

(G.C.Panigrahi)Chief General Manager

Annexure-IRegional Seminars for Chief of Internal Inspection / Audit Dept. of RRBs – 2010-11

Best Practices adopted by some RRBs in Internal Checks and Control Systems

North Malabar Gramin Bank

• Developed structured format for rating of branches • Bonus marks for prompt compliance to all HO instructions and negative

marks for deficiencies • Special letters sent to branches from HO• Portfolio audit • Exclusive manual in place for inspection

Krishna Gramin Bank

• The bank has introduced Risk Audit on pilot basis and moving towards risk based audit in due course.

• Weightage given to operational risk in inspection of branches • Common deficiencies shared with all branches • Weekly statement of affairs of the inspection department placed before top

management

Dena-Gujarat Gramin Bank

• Minor defects get rectified on the spot • Nominated a compliance officer• HO officials during visit to branches, verify the rectification of defects

pointed out in the audit and inspection.

Baitharani Gramin Bank

• Rating of branches is informed to the Vigilance Officer • In addition to the Audit Committee of the Board, an internal audit

committee is also formed to review internally the progress in audit, position of rectification of defects etc.

Maharashtra Gramin Bank

• Revenue audit and surprise verification of cash in vogue • Concurrent audit by CA. Also covers branch which account for 50% of the

business of the bank • Inspection periodicity depending upon rating • Inspection Department conducts workshops periodically.

Vananchal Gramin Bank

• Audit of compliance to KYC norms • Periodicity of audit depending upon Rating of branch • Compliance closed within 90 days

Utkal Gramin Bank

• Standardised Risk Management Check list for the inspector • Credit audit of advances of Rs.50 lakh and above • Separate income audit and leave audit conducted • For high NPA branches, spot audit • Audit mechanism reviewed by Chairman periodically

Cauvery-Kalpatharu Gramin Bank

• Surprise verification of cash by officers from other branch • Chief Manager –Inspection, visits a branch every month • There is a system of ‘snap audit’ in between 2 regular audits • Audit of HO departments and investment transactions in vogue• Revenue audit is conducted before March

South Malabar Gramin Bank

• Standardised format for rating of branches • All committees formed as per guidelines of NABARD • Surprise visits and snap visits by HO officers

Pragathi Gramin Bank • Introduced Risk Based Audit since October 2010 • Audit officers placed region-wise • Surprise inspection by neighbouring branch manager • Pass-book printing machines in all branches to check frauds • Whistle-blower staff awards• Put in place credit and operational risk management policies • Physical verification of outstanding pledge loans annually.

Andhra Pragathi

• Out of 16 inspecting officers, 2 are earmarked for vigilance • Bank has an own concurrent audit machinery • Portfolio audit of advances of `10 lakh and above • IS audit by software expert • Inspection of Regional Offices • Regional Mentoring Committees for ensuring prompt rectification of

deficiencies

Purvanchal Gramin Bank, Gorakhpur

• Has a branch network of 340.

• Introduction of Risk Focused Internal Audit w.e.f. 1st July 2009 broadly on

basis of system prevailing in Sponsor Bank

• Concurrent Audit of selected branches having business of `5 crore and

more.

• The Bank had introduced a system of Snap Audit under its internal checks

& control, so that any irregularity continuing at the branch is brought and

checked.

• A vigilance cell has been constituted at H. O. Level.

• Fraud prone areas are being identified and guidelines are issued from

time to time.

• The Bank had constituted Audit committee, Credit committee, A L M com-

mittee, Dead stock & stationery purchase committee and Investment com-

mittee.

• All circulars are provided to Auditor to update their knowledge.

• Monthly review of branches with reference to performance, internal con-

trol & inspection.

• Obtaining Branch Manager Certificate indicating, checking of entries,

generation of required reports on daily basis and checking thereof.

• Special drives on staff involvement in various tasks for e.g., recovery in

written off accounts, NPAs, business development.

• Best branch award on the basis of performance introduced in recognition

of overall performance on various parameters.

• Printed application form and relative documentation as complete set in

booklet form.

Baroda UP Gramin Bank

• The Internal Control System is transaction based and is once in 12 months

though Risk Based Internal Audit is yet to be introduced.

• Credit Audit of transactions especially of high value of approx. ` 10 lakh

and above is done within three months.

• There is revenue audit of select branches especially where leakage of ` 1

lakh and above, is observed.

• The bank had put in place a practice of conducting NPA audit of high and

nil NPA branches.

• A prescribed format has been put in place for H R Audit

• Migration Audit is being done for switching over to CBS platform.

• Compliance to inspection findings is given due importance.

• The Central Audit Committee is headed by the Chairman. There is a Re-

gional Audit Committee as sub committee to the Central Audit Committee

which takes care of issue of qualified acceptance certificate, closure of

compliance etc.,. A compliance officer monitors compliance.

• Bank had constituted Purchase Committee, Fraud Risk Group, Urban

Credit Cell and Rural Credit Cell and ALCO

• Inspections of branches -periodicity based upon ratings

• Inspection agenda is regularly reviewed by the Board.

• There is monthly meeting of inspecting officers

• A detailed Inspection Manual has been prescribed so as to maintain uni-

formity in inspection reports.

Sarva UP Gramin Bank, Meerut

• Comprehensive coverage of Inspection of branches .

• categorisation of branches based on inspection

• Periodicity of inspection is based upon the rating given to branch

• Risks confronted are categorised as low, medium, high and very high.

• HO and ROs are also subjected to internal inspection

• The bank has set up a back office to monitor sugar cane payments.• The bank has an audit committee, vigilance cell , investment committee,

purchase committee and compliance officer in place.

Narmada Malwa Gramin Bank, Indore

Introduced risk based internal audit

Audit committee at HO and RO

After inspection, an exit meeting is held and the report is given on the last

day of the inspection.

Monthly health profile is prepared for loans above ` 5 lakh and quarterly

profile of loans above ` 1 lakh

There is a daily movement register for securities

Adopted AML/CFT/ KYC guidelines/ standards

The bank is yet to put a CA in the audit committee

Credit inspection is conducted.

(5) J & K Gramin Bank

• The bank has an Inspection cell with three inspecting officers for its 170

branches.

• Periodicity of inspection is once in 18 months.

• The board reviews the inspection findings and the compliance is required

to be submitted in 45 to 90 days.

• There is a vigilance cell, recovery cell and an audit committee of the Board.

• Snap Audits are conducted.

• Reconciliation has been maintained upto date.

• The bank conforms to KYC/AML guidelines.

• CTR/STR is submitted regularly.

• All formats of loan applications etc. are updated and all assets are verified

in respect of loans advanced.

• Branches are categorised as per the risks encountered.

Ellaquai Dehati Bank, Srinagar

• Conducted Concurrent Audit, Risk Focused Internal Audit, Snap Audit and

Conversion Audit.

• As part of Business Development, the bank has implemented Credit Risk

Management, Operation Risk Management and strict guidelines for com-

pliance.

• Comprehensive coverage in Internal Audit

• Compliance & Follow-up covers compliance of rectification of deviations

within stipulated period, serious irregularities, gross negligence and

malafide intentions of erring officials referred to administrative section

for appropriate action.

• Branches are rated as Excellent (75% and above), Good(65% to 74%), Satis-

factory( 50% to 64% )and Unsatisfactory(Below 50%). The basis of such

grading is based upon the branch performance on core parameters such as

Business Development, Credit Risk Management, Operational Risk Man-

agement and external compliance.

Malwa Gramin Bank, Sangrur

• The revenue audit is done by a Chartered Accountant.

• The bank is switching over to the CBS platform.

• The bank has an Audit Committee and a Complaint Cell.

• The bank has been regular in furnishing compliance to NABARD and has

been rated as “A “ grade by NABARD.

• Compliant to RTI Act,2005.

Gurgaon Gramin Bank

• Has implemented CBS and completed 12 inspections under CBS.

• An Audit Committee has been constituted and inspections are conducted on

annual basis.

• Concurrent Audit is done on quarterly basis in respect of branches having

business of above `30 crore.

• Revenue Audit is done in respect of branches having business of less than `

30 crore.

• Preventive vigilance inspection is done in some select branches, wherein,

opening and conduct of deposit accounts is also seen.

• Information security audit is done.

• A 1000 point rating scale is in force to grade branches in Risk Based Intern-

al Audit. The scale also has provision for negative marks as also bonus

marks.

Marwarh Gramin Bank, Pali

• The bank has installed an Advanced Electronic Warning System

• The audit and inspection process have been computerised

• There are 6 auditors( three each from Sponsor Bank and the RRB

Nainital Almora Kshetriya Gramin Bank

• Starting migration audit of the CBS branches.

• Laptops have been provided by the bank to the inspecting officers, which

is helpful in the inspection and generation of the quality reports.

• Special Observation letters in respect of time barred debts are issued in-

variably in all cases ,where there is any time barred document .For other

serious irregularities SOL-GEN are issued .Special letters have been intro-

duced to address the other issues.

Chhattisgarh Gramin Bank

• Implemented Risk Based Internal Audit since October 2010. 55 branches are

already covered under CBS.

• Periodicity of inspection is decided based upon the rating achieved by the

branches. Branches with business levels exceeding ` 2 crore are subjected

to audit to ascertain income leakage.

• The bank has an Audit Committee and a Vigilance Cell

• After satisfactory compliance, the closure advice is issued by HO.

Baroda Rajasthan Gramin Bank

• The bank had issued booklet on KCC, SHG & Sulabh Loan with application

form & documents.

• The bank had adopted the various policies such as Business, Investment,

Loan, Recovery & Cheque collection, KYC, AML & CFT, Complaint dispos-

al, Training, Transfer, Risk Management, IT Security, & Compliance

Policy with the approval of the Board.

• The Bank has formed Audit, Business Review, Investment, Pricing,

Premises, Purchase, Audit Committee of the Board, Fraud Investigation &

Fraud Monitoring, Fraud Risk Group, Vigilance Committee, Risk Manage-

ment Committee & Internal Advisory committees with the approval of the

Board

• Introduction of Credit Rating System

• Introduction of Credit Audit

• System of Half Yearly classification of Advances & Quarterly classifica-

tion from June 2010

• Branch visit format devised

• Handing over and Taking over Proforma designed

• A system of risk audit was in practice

• All the branches are selected for revenue audit during a financial year.

• Special Audit in case of serious irregularities involving gross negligence/

malafide intentions.

• Inspectors make the comparative study of Income, Expenditure & Profit-

ability, of the branches. They also verify the position of rectification of

previous Inspection.

• A system of rating the branches based on various business .

• The audit officer is continued to stay upto 3/4 years and transferred to

main stream in usual course..

• Audit officers are trained to generate reports and auditing of computer-

ized branches.

• Copies of all circulars issued by controlling office are given to auditors.

• During the inspection scrutiny of the accounts of the staff members under-

taken as a part of preventive vigilance. Vigilance Cell headed by Scale 3

officer from the sponsor bank

• Tax Audit undertaken by Central Chartered Accountant annually.

• Branches are made aware of all sorts of revenue leakages at periodical in-

tervals. .

Hadoti KGB, Kota

• The bank has a network of 82 branches and is sponsored by Central Bank

of India.

• The bank had switched over to the CBS platform

• There has been a fraud of ` 3 crore in KCC and the 2 Branch Managers in-

volved have been arrested.

• The bank had constituted an Audit Committee and Vigilance Cell.

• The bank was yet to constitute a risk management committee and a fraud

risk group.

Mahakaushal Grameena Bank

• Inspections are conducted at a periodicity of 12 to 18 months.

• Monthly concurrent audit is carried out in respect of branches with busi-

ness of ` 5 crore and above through Chartered Accountants.

• The bank undertakes a tax audit and Risk Based Audit Cell had just com-

menced working.

Allahabad - UP Grameena Bank

• The bank had constituted an Audit Committee and Vigilance Cell.

• 100% concurrent audit is carried out in respect of branches with business

of ` 30 crore and above.

• The bank has a system of random checking of cash, attendance etc.

• The bank is yet to introduce risk management.

• There is a need to train auditors by the Sponsor Bank as the same exist in

other banks.

Paschim Banga RRB

• Compliance of the Inspection is done by officers from other Department of

the Regional Office , independently

• Customer Service is an important area which is looked into by the bank,

since banks are going public by way of listing

• Sundry debtors and reconciliation position under control

• Vigilance Cell set up at HO

• KYC/AML aspects seen during inspection. Principal Officers appointed by

the bank.

Bangiya GVBa) Well defines inspection policy. Inspect all operational units irrespective of

the size.

b) Backlog in inspection of branches.

c) Concurrent Audit for branches having business above `15 Crores

d) Empanelled CA firms engaged to conduct inspection and revenue audit.

Mizoram Rural Bank• Inspection periodicity based on scheduled and unscheduled status.• One snap Audit between two internal Audits.• Have Inspection Manual and Circular guidelines. Detailed manual on Inspection compiled and circulated to all branches by the sponsor bank • Revised Audit format clearly specifying all system and procedures to be followed• Sending appreciation letter to the branches whose rating have been upgraded .• A system of exit meeting of the Auditor/ inspector with the branch staff• Snap audit by Regional office. Reconciliation• Monthly statement by every branch to be submitted to HO.• Reconciliation position under control• Audit Committee not yet formed

Uttar Bihar Gramin Bank• Audit Structure – 23 Auditors. All audit by RO. HO is a controlling office• Audit Manual, formats are in place and clearly laid down• Inspection periodicity based on rating of the branches.• On the spot rectification by the branches on daily basis during audit/

inspection

Arunachal Pradesh RB• Only one officer in Audit Cell• Vigilance Cell in place • No Audit Committee

Samastipur Gramin Bank• All branches have Core Banking solution• Audit Cell comprises 2 auditors and one chief Auditor • Audit Committee in place

Langpi Dehangi RB• Only two officers in the Inspection Cell • Vigilance Cell set up by the RRB• KYC, AML, NPA position are given emphasis while conducting

inspection/ audit• Reconciliation up-to-date

Uttar Banga Gramin Bank

• No backlog in inspection• Reconciliation uptodate • Loan Manual clearly laid down by the bank• No Audit Committee.

Jharkhand Gramin Bank

• Inspection periodicity based on rating of the branches• Cash verification carried out on quarterly basis • Concurrent Audit for branches having advance above ` 10 crores • No arrears in audit/ inspection• All Branches will have CBS by the end of March 2011

Assam GVB• Separate Cell for Inspection• Vigilance Cell set up by the bank• System of Surprise cash verification• Risk based inspection not started• Concurrent audit for branches having business of ` 35 crore and above• Document audit for branches having high credit portfolio and high loans• No audit committee set up by the bank• Punitive measures such as salary stoppage, stoppage of increments for

non compliance of the inspection / audit observations• Inspection based on the rating of the branches• 40 branches migrated to CBS platform

Annexure-IIRegional Seminars for Chief of Internal Inspection / Audit Dept. of RRBs – 2010-11

Common deficiencies observed in internal checks and control systems in some RRBs

e) Arrears in Internal Inspection /Audit of branches was observed in many

banks.

f) There was no separate Inspection/Internal Supervision Department in a

few banks.

g) Audit Committee, Risk Management Committee, Fraud Risk Group,

Vigilance Cells were not constituted in some banks. In some other banks,

the committees were not effectively functioning.

h) All audit/inspection reports along with compliance thereto were not

placed before the Audit Committees / Boards in a few RRBs. Major

findings of audit, the rectification progress and the strategies to address

the deficiencies should also be placed before the Audit Committees and

thereafter the Board of Directors.

i) Proper maintenance of the books of accounts, regular balancing and

reconciliation was not ensured in a few RRBs.

j) A number of frauds had occurred due to weak internal checks systems The

incidence of fraud, etc., should be minimised by taking recourse to various

preventive, monitoring and management measures and by constituting

Fraud Risk Group as advised by NABARD from time to time.

k) There was delay in some cases, in furnishing various internal returns by

branches, statutory returns (including Off-Site Surveillance) by banks

l) As per the extant RBI instructions, all the unreconciled and outstanding

inter-branch accounts for more than six months would have to be fully

provided. However, in some banks there was no system of monitoring and

classification of inter-branch accounts age-wise to ensure making

necessary provision.

m) While computerisation is fast picking up in many banks, various

safeguards for safe back-up of data, consistent and reliable data

generation, etc., was not ensured. Disaster Recovery Management and

Business Continuity Planning needed much to be desired.

n) The banks were not taking measures for proper information-sharing

systems with Regulator/Supervisor/Sponsor banks and customers,

display of information at branches. The focus on MIS, disclosure,

transparency in practices, etc..

o) There were lacuna in ensuring that delegated powers are excercised at

various levels scrupulously as authorised by the Competent Authority.

p) System-Audit of computerized branches was not effective resulting in

perpetration of frauds.

q) There was no system of verification of cash by surprise.

r) No comprehensive customer acceptance policy was in place and customer

identification procedures were not followed as stipulated in the various

instructions / guidelines issued by RBI and NABARD on KYC/AML.

s) Banks were not prompt in submission of Cash Transaction Reports (CTR),

Suspicious Transaction Reports (STR) and Counterfeit Currency Reports

(CCR) as per the PML Act RBI / NABARD instructions.

t) Principal Officer was not nominated in many banks for ensuring proper

implementation and reporting under AML

u) Compliance Officer was not identified in some banks

Annexure-III

Regional Seminars for Chief of Internal Inspection / Audit Dept. of RRBs – 2010-11

Suggestions made by Groups to improve internal checks and control systems

(1) Reconciliation of inter-branch accounts – ways and means to minimize pending entries, possibility of freezing pending entries

• Branch adjustment account reconciliation should be completed within 30 days

• Reconciliation of DD arrangements with sponsor bank is posing problem and pending for long. Hence cooperation of sponsor is required

• Retired staff may be engaged for reconciliation work • Accounts not reconciled for 6 months may be freezed and separate staff

deployed for reconciliation. In case of amalgamation, freezing should be from the date of amalgamation

• Audit Committee to review the progress in reconciliation work • Region-wise audit committees may be formed internally to review

reconciliation • 100% provision may be made for all reconciled entries beyond 6 months • Wherever branches of sponsor bank is involved, the matter should be

taken with sponsor bank and sorted out • Delay in submission of statements by branches be avoided • Vouchers should be kept day/month/year-wise with clear demarcation or

in order • Access to old records should be regulated • Reconciliation of pending entries should be given top priority • In case of merger of banks, new coding of items should be given • Software for reconciliation to be used • Priority for reconciliation of entries with large amounts

(2) Frauds in RRBs – preventive and punitive measures – data building, MIS and reporting to NABARD

• Surprise verification of cash to be done by officers from HO visiting branches

• HO to have a brief report of all staff working in RRB • Half yearly meetings of all staff – circulating modus operandi of frauds • Many frauds occur due to negligence – staff education needed • Migration audit to be made compulsory • Staff accounts should be compulsorily checked during audit • Joint custody of important documents

• Physical verification of securities • To keep a watch over life-style of staff, staff not taking leave etc.

Compulsory rotation of duties • Stringent punishment for erring staff ‘• Password and other security measures to be adhered to strictly by all • Particulars of vendors should be on record • Any deviation/lapses should be brought to the notice of top management

immediately

(3) Risk Management System in RRBs

• RRBs to have a Risk Management Manual – NABARD may help in this regard

• Risk Management Committees to be formed wherever not already in existence

• Risk Based Audit to be introduced in phases • Credit Department to be strengthened by inducting trained and qualified

officers • NPA management cell to be formed • Rating of high-value borrowers to be introduced wherever not done • Setting up of credit committee to scrutinize high value proposals • Risk profiling of branches • Setting up of ALCO if not done already • Training to officers in Risk Based Internal Audit

(4) Internal Inspection & Audit – capacity building – increasing their functional value

• There should be one inspector for every 20-25 branches • The functions of Chief Inspector and Vigilance officer should not be with

same person • Training on Risk Based Internal Audit to be provided • Incentive in the form of appreciation letters for good work, detection of

frauds etc. • Self audit by branch manager by using the same audit format • Snap audit by Regional Head • Time norm for submission of compliance by branches and erring

branches to be penalized • Periodical workshops / seminars for auditors / inspectors• Periodic meetings with top level officials for motivation and effective

coordination.