Banks’ auditors under lens: RBI seeks explanation on differences in write-downs

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According to RBI data, PSU banks in FY17 have written off Rs 81,683 crore against Rs 2.49 lakh crore in the past five years.

The Reserve Bank of India (RBI) has questioned scores of auditors at 27 public sector banks on the process and logic they had used to compute and report write-downs at the lenders, two people close to the development told ET.

The RBI has sought written explanation on differences in the write-down assessments by its own inspectors and those certified by the auditors. A write-down is a reduction in the estimated and nominal value of an asset, and is charged off as a loss to the profit and loss account for the relevant period. In some cases, the RBI has also questioned the provisioning methodology and non-performing asset (NPA) figures arrived at by the auditors at a few public sector banks, sources told ET.

The banking regulator is examining whether auditors at these state-run lenders followed RBI guidelines on write-downs, provisioning and NPAs. “This is part of RBI’s annual assessment. Auditors will have to explain how they provisioned for NPA and how they calculated write-downs,” said a person aware of the matter.

The write-downs, NPA and provisioning figures arrived at by the auditors and RBI inspectors differ by up to 10%.

WRITE-DOWNS & PROVISIONING
According to RBI data, PSU banks in FY17 have written off Rs 81,683 crore against Rs 2.49 lakh crore in the past five years. In a few cases, the audit reports of some of these lenders do not reflect these write-downs, said one of the persons cited above. Most banks do not separately report write-downs in their accounts, combining them often with quarterly provisioning.

Most Indian public sector banks use more than one auditor due to the enormous size of their balance sheets. Most auditors are mid-to-small Indian firms that audit several branches. The 27 public sector banks collectively employ 115 auditors, according to data analysed by the ET Intelligence Group.

According to the people in the know, auditors at State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Allahabad Bank and Bank of India (BoI) were sent the show-cause notices about two weeks ago.

ET’s detailed email queries to the regulator and the affected lenders – SBI, PNB, BoB, IDBI, Indian Overseas Bank, Canara Bank, BoI, Oriental Bank of Commerce (OBC) and Allahabad Bank – did not elicit any response.

REGULATOR HAS PRIVILEGED ACCESS’
According to a major bank’s auditor who did not wish to be identified, the differences are not unexpected. “The RBI has access to information an auditor may not. Like, if a loan in bank X has gone toxic, the auditor of bank Y may not know, but the RBI would,” he said. He added that there is a time lapse between auditors preparing an account and the RBI conducting inspections. “What you must look at is the impact on the P&L of a bank due to divergence. In most cases, that is not much,” he said.

To be sure, there may have been ‘technical’ errors in interpreting the writedown rules, resulting in the differences. “There is a direct impact of the new accounting standards on the way write-downs are arrived at,” said a senior executive at a top audit firm. “Under the old accounting system, the rules around write-downs were not as precise, and there is a possibility that some auditors may have ignored this.”

Source: Economic Times

GST spawns Rs 20,000 crore business for tax, tech consultants

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For decades, Sugal & Damani Group focused on lotteries before it entered the online bill payment business with Payworld.

Now, it has become a GST service provider (GSP), an entity that will help businesses register, upload electronic invoices and file on the technology platform, and plans to leverage its network.

Pune-based Vayana Network has been working with small and medium enterprises (SMEs) to arrange funds and has no experience of taxation, but it too has become a GSP and is eyeing business from companies, their vendors as well as standalone SMEs.

Besides GSPs, GST has given birth to another set of entities called ‘application service providers’ or ASPs that will use sales and purchase data from taxpayers and convert it into GST returns for filing online.GST is spawning a $2 billion-3 billion (Rs 13,000 crore-20,000 crore) industry comprising software service providers, ASPs and GSPs, chartered accountants and consulting firms as the entire industry is undergoing business process re-engineering.

SAP and Oracle, the big daddies of the ERP business, may mop up revenues of at least $1 billion (Rs 6,500 crore) over the next two years, industry players say.

Homegrown Tally Solutions, which has close to 11 lakh users of its accounting software, has already got around six lakh subscriptions from businesses, which entitles them to free upgrades and access to all information.

While the cost of software varies between Rs 18,000 and Rs 54,000, each annual subscription fetches the company Rs 3,600 (for a single user) to Rs 10,800 (multiple users).

With 10,000 melas planned in the next one month, the company is out to garner as much business as possible while helping businesses tackle GST, said Tally Systems executive director Tejas Goenka.

Even a smaller player like the newly set up Ginesys is eyeing a turnover of around Rs 100 crore in three years, said co-founder Ashish Mittal. Then, there are the likes of ClearTax, which was set up to file income tax returns. Sensing a huge business opportunity it has expanded into the GST arena with its software and tie-ups with around 10,000 chartered accountants, said ClearTax founder CEO Archit Gupta.

Not surprisingly, companies have hired big time to meet the required demand. SAP and its partners have around 500-600 people working on implementing ERP solutions, business filing, supply chain and the app for filing returns, said Neeraj Athalye, who leads the firm’s GST adoption drive. Cleartax has hired around 400 in the last one year or so.The big four accounting firms too have ramped up. Deloitte’s indirect tax team has around 250 new recruits, while PwC has expanded its pool of CAs and systems executives by 200-250. While the billing for large companies runs into crores, including consulting services, the smaller companies are banking on volumes with some charging a fee of as low as Rs 100-200 a month for filing returns.

Bankruptcy Code: Banks to refer Essar Steel, Electrosteel, Bhushan Steel to NCLT

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The fate of three near-bankrupt steel companies — Essar Steel, Bhushan Steel and Electrosteel Steels — which together owe lenders nearly Rs.1 lakh crore will now be decided by the National Company Law Tribunal (NCLT).

The fate of three near-bankrupt steel companies — Essar Steel, Bhushan Steel and Electrosteel Steels — which together owe lenders nearly `1 lakh crore will now be decided by the National Company Law Tribunal (NCLT). Having failed to recover their dues or rope in either strategic or financial investors, lenders to these companies finally agreed on Thursday to resort to the Insolvency and Bankruptcy Code (IBC), bankers familiar with the development said. The decision follows a directive by Reserve Bank of India (RBI) on June 13 to banks asking them to refer a dozen troubled companies — with a combined debt of close to Rs.2.4 lakh crore — to the tribunal.

Corporate watchers said a new chapter was unfolding for India Inc, traditionally unfamiliar with insolvencies and, more often than not, able to wrangle concessions and bailouts, often with the help of those in power. Both the RBI and the government are attempting a speedy resolution to the problem of non-performing assets (NPAs) that is paralysing banks and stymieing investments.
While it has been known for several years now that many of the country’s top corporates are financially fragile, it was former RBI governor Raghuram Rajan who first forced banks to accept the reality and classify assets correctly in December 2015.

Bankers have been given a fortnight within which to move the tribunal. Among the other companies that have been refereed to the NCLT are Jyoti Structures, Lanco Infratech, Monnet Ispat and JP Infratech. The 12 accounts identified by the central bank are those to which banks have an exposure of more than Rs 5,000 crore, more than 60% of which has been recognised as NPAs. Once these cases are with the NCLT, the lenders need to set up a committee of creditors that will come up with a plan on how the asset will be tackled. If the committee is unable to find a solution within 180 days — this can be extended to 270 days — the borrowing entity will go into liquidation.

The three steelcos — Essar, Bhushan and Electrosteel — together have a manufacturing capacity of close to 18 million tonnes per annum. The total debt of the Essar Group is estimated at Rs.1.17 lakh crore. Most private banks have sold off their Essar Steel exposure to asset reconstruction companies, taking a haircut of more than 50%; most PSU banks have declared Essar Steel an NPA.
Essar Steel, promoted by the Ruias, had at a meeting last year requested banks to convert Rs.12,200 crore of loans into preference capital and equity shares.

While Rs.9,000 crore was sought to be converted into preference shares, to be redeemed after 12-18 years, the company had requested the remaining Rs 3,200 crore be converted into common equity. For the balance Rs 31,800 crore, the company had sought a prolonged repayment period. Senior bankers had told FE such a deep restructuring proposal, if approved by the consortium, would amount to taking a haircut of nearly 30%.

Bhushan Steel, promoted by the Singals, has been unable to service its loans for several years now thanks to the stress on cash flows, partly the result of large steel imports into the country which drove down prices. While banks had been monitoring the company’s operations and financials, they were unable to come up with a solution. In August 2014, a senior company executive was arrested around the time the former chairman and managing director of Syndicate Bank SK Jain was arrested in an alleged case of bribery.

In the case of Electrosteel Steels, banks decided to initiate a strategic debt restructuring, with a view to roping in a new investor and beefing the equity capital of the company. However, despite many attempts, banks were unable to find a buyer within the stipulated 18 months, and were compelled to classify the account as an NPA.

Source: http://www.financialexpress.com/economy/bankruptcy-code-banks-to-refer-essar-steel-electrosteel-bhushan-steel-to-nclt/731747/

Stressed assets open floodgates for insolvency professionals

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State Bank of India seeks applications for empanelment, sets stiff conditions

The Reserve Bank of India’s (RBI’s) move to push 12 large non-performing assets (NPAs) of the banking system into the insolvency process has created a massive business opportunity of up to Rs.2,500 crore for insolvency professionals.

To put the numbers in perspective, the RBI list comprises four companies with dues of over Rs.35,000 crore each. Even if one puts together all the few hundred cases handled by the six-month old framework, it would be a struggle to cross Rs.20,000 crore.

While the huge influx is likely to test the capacity of most players who are literally months old in the profession and present a steep learning curve, it will be a great stimulus for entry of stronger hands and investment in the segment.

According to the insolvency law, the entire process of corporate insolvency needs to be managed by a resolution professional appointed by a committee of creditors. The resolution professional, who will effectively become the chief executive officer of the business during the process period of 180 days, can charge a fee for his services. Besides, banks are also looking to appoint insolvency professionals to populate committees of creditors, which need to be formed for each of these companies.

With over Rs. 2.5 lakh crore debt coming in the top 12 companies in the first list, a one per cent charge works out to Rs. 2,500 crore. While this would be a ballpark figure, regulations do not prescribe a limit or range of fees, leaving a free hand for market forces. Globally, insolvency professionals work on various structures such as a fixed fee, time and effort-based charges, or a percentage of realisation. In some cases, a combination of these three methods could also be used. Banks would have pricing power, but good insolvency professionals would have their levers to charge a decent number, given the complexities involved and short supply.

Pavan K Vijay, managing director of Corporate Professionals, a Delhi-based firm that is looking at this opportunity, says the move gives a big boost to the nascent profession. “Even if the one per cent number does not work out, as there are bound to be negotiations, it could be around Rs.1,500 crore to Rs.2,000 crore. It is not small.”

The State Bank of India (SBI), the country’s largest lender, which also has the lion’s share of these 12 large accounts, has begun the process of empanelling insolvency professionals by issuing advertisements recently.

“The bank (SBI) seeks to empanel IRPs (insolvency resolution professionals) as resolution professionals in applications filed before the National Company Law Tribunal for resolution and/or liquidation proceedings, including for representing the bank in the committee of creditors as per the provisions of the code/and the regulations,” said the advertisements issued early last week.

Other banks are likely to follow similar processes in selecting insolvency professionals, as the public sector is generally process driven, regulatory officials say.

According to the Insolvency and Bankruptcy Board of India (IBBI) website, there were some 977 registered insolvency professionals in the inaugural limited period criteria and another 350 in the regular category, which requires passing the national insolvency examination. Lawyers, chartered accountants, and company secretaries form a majority. However, not all of them might be able to handle the large mandates. Given the large accounts it handles, the SBI has set stiff eligibility criteria for the applicants. It wants people with experience in debt restructuring, who are also experts in company law, etc. The application window closes early next week. Since the big accounts bring with them a lot of complexities, individual professionals might not be able to handle the entire task, Vijay said.

Several top lawyers such as Shardul Shroff and Pallavi Shroff of Shardul Amarchand Mangaldas, Alok Dhir of Dhir & Dhir, Bahram Vakil and Dushyant Dave are among the registered insolvency professionals. These would have established infrastructure and people to support their functions.

Also, the insolvency law provides for Insolvency Professional Entities (IPEs), which are corporate structures where two or more professionals can come together as partners or directors. However, there are only seven such registered IPEs as of today, according to the IBBI website. These are IRR Insolvency Professionals, a firm floated by Delhi-based lawyer Alok Dhir, AAA Insolvency Professionals, Witworth Insolvency Professionals, Gyan Shree Insolvency Professionals, A2Z Insolvency Services, Turnaround Insolvency and Nangia Insolvency Professionals.

Sandeep Gupta of Witworth, which is already handling a few mandates, feels while the opportunity is big, capacity and capabilities also need to be built up. “It is the beyond the means of an individual to handle a book size of several thousand crores. A company of such a size would have numerous non-financial creditors as well. These need to be handled in a given time frame. The resolution professional would need adequate support in terms of people and infrastructure,” he said.

For instance, Gupta said, he might hire a few freelance chief financial officers to manage one of the big accounts. Considering all this, calculating fee on a percentage basis could be misleading. It should be calculated, based on time and effort put in by the insolvency professional, he argued.

The SBI advertisement asks applicants to provide “tentative fees proposed to be charged” for various roles such as interim resolution professional, resolution professional on behalf of the committee of creditors or for being appointed as an insolvency professional to represent the bank in the committee of creditors. The bank also wanted to know whether the applicant would be “willing to abide by the fees decided by the bank.”

Source: https://www.pressreader.com/india/business-standard/20170619/281479276408067

RBI examining relaxing Bad Loan Classification Limit beyond 90 days for SMEs

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The Reserve Bank of India (RBI) is looking into a request to extend the classification period for non-performing assets (NPAs) to help small and medium enterprises (SMEs).

“Some people have made representation to the finance ministry of raising the NPA classification period beyond existing 90 days. This issue is under consideration. It is being examined by the RBI,” Minister of State for Finance Arjun Ram Meghwal told newswire PTI.

 

Summary
  • RBI looking at request to raise the NPA classification period beyond the current level.
  • Currently, an account turns into NPA or bad loan if it is not serviced for 90 days.
  • In case of small businesses and SMEs, payments come usually late.

Currently, an account turns into a non-performing asset (NPA) or bad loan if it is not serviced for 90 days.In case of small businesses and SMEs, payments come usually late. Once they miss the 90-day period and fall in the NPA category, their credit line is cut.

In the absence of vibrant factoring or trade receivable market, small businesses and SMEs face the issue of timely credit availability. Meghwal also said that there is a need to strengthen loan restructuring mechanism in an effort to tackle inflation.

Loan restructuring is reviewed by the RBI from time to time as part of its effort to fight the mounting NPAs in the banking system.

Most recently, the minister said, the government brought in an ordinance giving wide-ranging legislative powers to the Reserve Bank to fight NPAs.

The ordinance authorises RBI to issue directions to any bank to initiate insolvency resolution process in the event of a default under the provisions of the Insolvency and Bankruptcy Code (IBC), 2016.

As per some estimates, banks are sitting on unrecognised stressed loans worth Rs 7.7 lakh crore in corporate and SME sectors and expect around 35 per cent of them to slip into the NPA category in the next 12-18 months.

There is a likelihood of Rs 2.6 lakh crore of corporate and SME loans, which are 3.2 per cent of total bank credit to be recognised as stressed loans by 2019.

Stressed loans include restructured assets that carry the risk of turning into NPAs.

Source: https://www.bloombergquint.com/law-and-policy/2017/06/13/rbi-examining-relaxing-bad-loan-classification-limit-beyond-90-days-for-smes

MEFICAI Empanelment/ Bank Branch Auditors Panel for FY 2016-17

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Multipurpose Empanelment Form of ICAI (MEF-ICAI) is an online application, which is meant for allotment of Bank/ Branch Audits to the ICAI Members/ CA Firms.

a) Final Bank Branch Auditors Panel for the FY 2016-17

The ICAI has prepared the “Final Bank Branch Auditors’ Panel of Chartered Accountants/ CA Firms (MEF) for the Financial Year 2016-17” and the same is hosted at MEFICAI website till 20 Jan. 2017. Thereafter the final panel is being sent to RBI.

To view your category and remarks thereof, if any, please click on the relevant interval, as below:

Final Panel

MEF00001-05000

MEF05001-10000 

MEF10001-15000 

MEF15001-20000 

MEF20001-25000 

MEF25001-30000 

MEF30001-35000 

MEF35001-40000

MEF40001-45000 

MEF45001-50000 

MEF50001-55000 

MEF55001-60000

MEF60001-73666

For any other query/ issue, please contact  ICAI’s PDC Secretariat on 011-30110444. Also, please visit MEFICAI website for updated/ official version of Draft/ Final Panel.

b) MEF-ICAI Multipurpose Empanelment Form 2016-17

MEF 2016-17 for empanelment of Bank Branch Auditors for FY 2016-17 is hosted at MEFICAI website. MEF 2016-17 is divided into three parts, i.e. i) Part A: For Bank Branch Auditor’s panel ; ii) Part B: For Additional information for Multipurpose Empanelment; and iii) Part C: For panel of Cooperative Societies and Cooperative Banks.

In line with ICAI Notification dt. 7 April, entities are being advised to avail the Multipurpose Empanelment data available with ICAI for allotting various assignments in response to tenders, including for Cooperative Societies. Accordingly PART B & PART C has been included in MEF 2016-17.

c) Other related items

View or Download PDF Copy:

 RBI Approved Audit Firms for appointment as CSA in Banks for 2015-16

 RBI Norms on Eligibility, Empanelment, Appointment of Branch Auditors 2015-16

 Revised MEFICAI Norms for Firm Category for Allocation of Bank Branch Audit

 RBI Norms for Appointment of Bank CSA from 2016-17 onwards

CAs, Merchant Bankers face fine if assessees file wrong tax information

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CBDT chairman Sushil Chandra addressing a CII interactive session on Union Budget 2017-18 in New Delhi on Monday.

From April 1, chartered accountants (CAs), merchant bankers and valuers can’t escape responsibility for filing of incorrect information in certificates or reports attached with income tax returns of assessees.

 

They will be fined Rs 10,000 for each such certificates or reports, according to a provision in the Budget for 2017-18.

 

For this purpose, the Budget has proposed to insert a new section, 271J, in the Income Tax Act.

 

“Under Section 271J… we have entrusted responsibility with chartered accountants, valuers and merchant bankers who files audit, valuation reports and other things…,” CBDT Chairman Sushil Chandra said at a post-Budget interaction with PHD Chamber of Commerce and Industry here. “So, if they file any incorrect information in the returns, they are also liable for a token penalty of Rs 10,000.”

 

The whole system is based on “a lot of faith on CAs and assessees and they have to be more responsible”, he said.

 

While there are many provisions to penalise the defaulting assessees, there was none to penalise CAs, merchant bankers and valuers.

 

A memorandum to the Finance Bill said: “In order to ensure that the person furnishing reports or certificates undertakes due diligence before making such certification, it is proposed to insert a new section (271J in the Act) so as to provide that if an accountant or a merchant banker or a registered valuer furnishes incorrect information in a report or certificate, the assessing officer or the commissioner (appeals) may direct him to pay a sum of Rs 10,000 for each such report or certificate by way of penalty.”

 

Chandra said the objective of the Budget was to improve tax compliance along with increasing tax base and improving ease of doing business.

 

Non-compliance level was high despite low tax, he said, adding that Indians named in various black money reports, including Panama Papers, were among the highest.

 

He pointed to high level of evasion of tax and tendency to export black money to foreign shores in spite of having global practices and standards, emphasising that this has to come down. “The department has done its bit, now it’s time for the taxpayers to show their respect to the law of land,” he said.

 

On long-term capital gains tax, he said the Budget has tried to plug gaps.

 

In the past few years, the tax department has detected Rs 80,000-crore sale consideration through the penny stock mechanism, the CBDT chief said, adding that this was used for conversion of black money into white.

 

However, “neither have we changed capital tax regime nor have we changed any law. So, whosoever was getting the benefit of long-term capital gains through ESOP, IPO and FPO is not going to change”.

 

Nothing is going to change except misuse, he clarified.