PERFORMANCE BUDGETING

Concept of Planning:

Planning is the integral part of a progressive organization. It is an activity, which forces the management to look at all aspects as they exist at present or at a foreseeable future date and then make a decision on a line or line of business. It is anticipatory thinking and determining the events of tomorrow. It is translation of knowledge into action. Plan is a scheme for accomplishing a purpose

What is planning?

Planning is an act of formulating a programme for a definite course of action. It is determination of goals and objectives and logical thinking and systematic selection of options of enterprise, its policies, programmes and procedures for achieving them.
Planning is for foreseeing the uncertainties of the future as well as to cope with the complexities, problems and opportunities resulting from change. It is required in performing managerial functions of organising, staffing, leading, and controlling operations
It involves selecting missions and objectives and the actions to achieve them. It is a continuous process of making systematic decisions with greatest knowledge of futurity. It provides a rational approach to pre-selected objectives.
Planning is a coordinated effort towards attainment of predetermined objectives and is the springboard for action. It is a process, which involves selection from among many alternatives. It is a series of logical interrelated procedures. It bridges gap from where we are to where we want to go and helps management to prepare for action. Planning is setting goals on the basis of objectives and keeping in view the resources.

Elements of Planning: -

Planning is a continuous ongoing process for growth and involves following important elements necessary for growth.
1. G= Goal Setting: - Deciding Levels of performance. What should be the out put/ business level.
2. R=Resources:-How the goals be met keeping in view internal and external factors affecting the business.? What resources are required? Men, material and money.
3. O= Opportunity:-What are the new opportunities, avenues available and which one/ all are to be tapped?
4. W= Will: - whether we are really willing /serious.
5. T=time schedule:- Duration of the period chosen. Period for which the plan is to be made.Longrange plan or short range plan? When will it be done?
6. H=Human: - Who will do/ implement it, and monitor the output and guide?

These elements are based on identifying opportunities and threats in the environment as well as internal weakness, setting long-term goals and formulating strategies and action plans.
Thus it would be observed that planning is
· Organization specific
· Future oriented - It is scientific forecasting of future.
· It involves imagination, thinking and judgment
· It is choosing from amongst alternatives
· It is effective utilization of resources

The GOALS should be
· Realistic
· Specific
· Acceptable
· Easily measurable
· To be set by person having authority

Steps in Planning: -

For effective planning and its implementation a series of thought processes are needed. These thought processes are organisational specific. However, the basic steps that are required by any organisation are enumerated below.

1. What are the opportunities available –i.e.
· Economic condition, Government policies.
· Market- what is the demand of the product?
· Who are competitors? How are the doing in the market?
· What are the requirements of customer and their expectations?
· What are the strengths and weaknesses of the organisation?
· What do we expect to gain?

2. What are the objectives i.e.
· What is the mission, organizational philosophy?
· What do we want to accomplish?
· Whether it is a long rage or short range objective
· What is the time frame?
3. Strategies
· What markets are to be tapped?
· What will be the volume of sales?
· What will be the price of the product/ service?
· What will be the cost?
· What will be the cost of labour?
· What is the tax structure?
· What is political/social environment?
· How to meet the resources?

4. Options
· What alternatives are available?
· What are fruitful possibilities?

5. Preparation of budget
· Cash and capital budget
· Income and expenses
· Profit/surplus
· All types of resources- men, material money
6. Monitoring

Budget: -

Budgets are vision of organisation. It is a fundamental planning instrument and an important tool for an organisation to implement strategy. It is the process of translating planning and performing decisions into specific projected financial plans for relatively short period of time. Budget is a statement of expected results expressed in numerical terms It is a road map against which actual performance is assessed .It helps in focusing attention on areas of concern so that necessary corrective actions can be undertaken.
Budgeting helps managers in coordinating their efforts with corporate philosophy and goals. Budgets are the benchmarks against which performance can be evaluated when variations between actual performance and budgeted performance arise.

Why Budgeting?

Creating a budget is important because it;
· Forces an organisation to carefully consider the expected demand for its products and services and resources required to meet the demand.
· Translates the organisations higher priorities into the appropriate resources required to achieving these priorities.
· Highlighting potential problems in sufficient time to take corrective action.
· Create a base line against which actual results cab be compared.

Primary sources for a budget:

There are basically three primary inputs to a typical budgeting process: -

1. Plans- Organisations plans and priorities are the important drive to budgeting process. Budgets should reflect management’s planned change initiatives, related to cash and expected results.
2. Performance- Past and present performance as well as that of similar organisations should contribute to the budgeting process. Due consideration is to be given to uncontrollable external changes that could dramatically affect the operations and its results viz. Change in global market,change in technology, economic slow down etc.,
3. People- Good intra and inter organisational communications are essential to developing both good plans and good budgets.

Process involved in Performance Budgeting:

1. Identification of command area – The area of operation
2. Preparing area profile- business potential in the command area
3. Comparing Past business- Trend
4. Environmental scanning of market segments.-Competitor’s business strategies. Market share, business growth.
5. Internal environment of resources.
6. External sources
4. Identifying and understanding gaps between previously established goals and past performance.
* Evaluate performance in the light of goals and identify gaps.
* Relate gaps to environmental conditions.
* Relate gaps to organizational capabilities
* Identify future goals, given understanding of gaps.
* Describe broad action plans aimed for meeting goals.
*Identifying resources needed to close the gap between current performance and future goals.
* Distributing those resources
* Monitoring their use in moving the organization closer to reaching its goals.

Performance Budgeting in Banks: -

It is budgeting for the performance. It is work plan i.e. target and output. A performance budget is one, which presents the purpose and objectives for which funds are requested, the cost of programmes prepared for achieving these objectives and quantitative data measuring the accomplishments and work performance under each programme. In service industry like banking, performance budgeting plays vital role.
Performance budgeting plays an important role in banks. It is a comprehensive management system, which provides organic link between objectives on one side and physical targets and achievement on the other. It implies planning of bank’s activity either for short term or for long term, keeping in view both external and internal environment. This activity calls upon bank management to look into all aspects for chalking out possible courses of action. Obviously this requires data based study and analysis. It is planned performance. It guides the organization towards achieving the budgeted goals and develops a system of control, review and monitoring an essential ingredient for a systemic growth.
It is a handy monitoring tool to review the performance at a predetermined periodic level by the controlling and supervising authorities. This helps operational units in reviewing their own performance. This is an exercise of self-assessment of self-performance. Per formation budgeting exercise is a scientific guestimation of future performance in a viable environment where changes are taking place frequently. It is an exercise, which takes planning at the level where performance lies i.e. at the branches.

While preparing budget following important dimensions are needed

· Desired Market share and competitive niche
· specific level of production efficiency
· Meeting other strategic goals.
· The level of profit and other indication of financial performance.
· Expected level of worker’s productivity and positive attitudes
· Responsibility towards customers and society

Every bank has its own system for initiating budget exercise .Before initiating budget exercise corporate office of the banks issues Business Policy Guidelines /Plan for the financial year.

1. Policy guidelines Document: - It is the blueprint of future. It contains bank’s business plan for the year for which budget is to be prepared .It quantifies annual goals at the corporate level It also contains future vision, aspirations of the bank and corporate objectives and direction how the goals are to be achieved . While preparing annual goals banks take into account market potentials, growth rate of competitors, trends in the economy, growth in GDP, money supply, rate of inflation, developmental projects launched by the government, etc. The policy document is sent to all the branches and administrative offices.

2. Planning at Controlling Levels: On receipt of the policy guidelines from corporate office the zones prepare their own business plan document for the fiscal in tune with corporate objectives, goals and rate of growth envisaged by the corporate office. However, while preparing zonal guidelines potentials in the geographical area, economic trend in the state, State Government’s development plans, Budget allocations to various developmental schemes, growth rate of competitors, decisions taken in State Level Bankers Committee etc are kept in to consideration. The zonal policy guidelines are then sent to all the regions and the branches working in the zone along with corporate business policy guidelines , with detailed instructions to prepare regional budget.

3. Preparation of Regional Budget: After receiving both corporate business policy document and zonal policy guidelines the regions advise branches under their jurisdiction and supervision to prepare their annual budget. Branches are also advised to go through the growth targets projected in District Credit Plan and Annual Action Plan. Branches are also asked to look into the business growth in their respective districts ,the market share. Detailed guidelines are given to the branches on the methodology for preparing budget. Blank formats are sent to the branches for filling up historical statistical information pertaining to various business parameters. This makes the task of preparing budget easy and branches are in a better position to project future performance. This also gives them insight into their strengths and weakness and helps them in planning strategies improving operations and withstands competition and challenges.

4. Budgeting at branch level: On getting policy guidelines and the blank formats and guidelines , branches scan the external and internal environment in their area of operations and analyze data for preceding years, and then project the various levels of activities keeping in view the priorities of the bank and the potentials in the area of operation, and translate the plan into budget. Branch managers take cognizance of existing or likely competition and make assessment of his internal strengths and weakness comprising the level of skills of the personnel, infrastructural facilities and other support system.

5. Discussions at the Regional level: Once the branches submit budget to their respective regional offices in the prescribed format, the projections made by them are scrutinized .A meeting with the branch managers is held to discuss inconsistency in the figures, mistakes in computing income ,expenses and also to ascertain the reasons for low projections, very high projectio9ns as the case may be, the purpose is to prepare a realistic budget.. It is ensured that economic activities in the geographical area of the region have been taken care and the projections made by them are discussed across the table and amendments if any are made in consultation with them in the draft budget Reasons for low level projections are deliberated and necessary organisational and managerial support is assured in the areas affecting subdued business growth.
6. Submission of Regional budgets: After finalizing the draft budget with the branches, the budgets received from all the branches in the region are consolidated and submitted to the zonal offices for scrutiny and finalisation after mutual discussions

7. Preparation of Zonal Budget: On the basis of draft budget received from the regions, budget for the zone is finalized after detailed deliberations between the Regional heads and Zonal office .The zonal budget thereafter is submitted to corporate office. On the basis of budgets received by corporate office budget for the entire bank is prepared.

8. Finalization of bank’s budget : Before giving final shape to the budget of the bank detailed discussions with Regional and Zonal authorities take place at corporate level to discuss on all the parameters .The budget prepared by the zones in different areas of banks operations are discussed with the concerned monitoring executives in the area of their operations at the corporate level and final touches are given to the budget and a consensus document is prepared after finalizing the budget of each zone and MOU is signed with the respective zonal head . After finalization of the budget at the corporate office the Zonal offices allocate targets to the Regions who in turn allocate budgeted targets to the branches., for achieving the goal.
9. Approval of Board: Since budget is a policy document it requires approval of Board of Directors who ensures that the budget meets corporate vision, meets aspirations of various sections of economy and government directives.

Performance monitoring:

The efficacy of budgeting is lost if the performance is not measured and monitored with the budget. Therefore it has to be checked with budgeted level under each activity and this has to be done at several points of time during the year.
Successful implementation of strategies requires a well-designed control system. Planning and control are inseparable. They are the Siamese twins of management. Any attempt to control without plans is meaningless. Monitoring is:
1. Comparison of performance across various time periods
2. Comparison of performance with industry norms and key competitors
3. Monthly targets for branches fixed on the basis of budgets
4. Monitoring on monthly basis or at pre-decided interval

As whole economic system is dynamic the performance under all heads will not match with the budgeted level there are bound to be variance which can either be positive or negative..

Variance: -

Variance is the difference between the budgeted level of performance and actual performance. Reasons for the variance have to be ascertained for taking corrective measures. The actual performance results vis a vis budget provides the manager a ready opportunity to look at the totality of the branch performance. It also helps in identifying the areas of critical importance, Variance may occur due to

· Preponement or postponement of certain assumed events
· Change in external environment which might have upset the assumption
· The assumption might not have been correct

In a scientific system of budgeting a mere explanation for the shortfall is not adequate unless it is accompanied by suggestions for correction.

The efficiency of a system is measured by the efficiency with which the inputs are transformed into outputs.

Types of Financial and non-financial budgets:

· Revenue and Expenditure Budget: It is the most common budget. It spells out plan for revenues and operating expenditure in monetary terms. This is worked out on the basis of projected business growth,ie deposits and advances and income generated from advances and amount spent towards payment of interest, staff expenses and other expenses,
· Capital Budget: -These budgets outline expenses for fixed assets, plant, machinery equipment, furniture and fixtures etc.
· Staff Budget: With the growth in business, requirement of man power increases. Branches also project their man power requirement in the budget.
· Time. Space, material and product Budgets: - These are the budgets expressed in non-monetary terms viz. quantities, qualities, product innovation, layouts, and time schedule.etc.

Budgets can be prepared in following manner: -

· Variable or Flexible Budgets: - Variable budgeting involves selecting some unit of measure that reflects volume;. The variable budget is based upon an analysis of expense items to determine how individual costs would vary with volume of output. Some costs do not vary with volume, particularly in short period viz. depreciation, property taxes, insurance, maintenance of plant and equipment, cost of supervision, etc. Stand by cost, or period cost such as maintaining a minimum number of key or trained personnel for advertisement or sales promotion and for research. Variable budgets work best when business volume can be reasonably well forecast and when long-range plans are made so that level of expense will not have to be changed.

· Alternative and Supplementary Budget: -This is modification of variable budgeting. Some times budgets for high level of operation, medium level, and a low level are prepared for each organizational segment for 6 or 12 months in advance and at a stated time it is informed which budget is to be used for planning and control. Budget flexibility is also obtained with supplemental budget depending on the business forecast. This budget gives authority for scheduling output and spending funds above the basic budget if, and to the extent that, the short-term plans so justify.
· Zero –Base Budgeting: -This is basically for cost control The idea behind this technique is to divide enterprise programme into packages composed of goals, activities and needed resources and then to calculate costs for each package from the ground up. The costs are calculated a fresh for each budget period, thus avoiding the common tendency in budgeting of looking only at changes from a previous period. The advantage of this technique is that it forces managers to plan each programme package a fresh. This helps in reviewing established programme and their costs in entirety along with newer programmes and their cost.

Strategic Planning: - It is a plan to achieve a vision. It is planning different options .It reflects a path, which will enable an organization to reposition itself as a competitive and progressive organization in future. While making a strategic plan. One would have to assess the organization’s current position and strengths and weaknesses, determine the organization’s future desired position and evaluate the marketplace opportunities. Strategic planning can position an organization to see beyond the present by focusing on what clients will want in the years ahead.

Deposit Accounts

As per Banking Regulations Act, Banking is accepting of money for the purposes of lending , investment and the money so accepted is payable on demand or otherwise.Thus Bank deposits can be broadly classified in to:

(1) Demand deposits
(2) Time /Term deposits

Demand deposits: -

Demand deposits are those deposits, which can be withdrawn on demand. Saving bank, current account and overdue deposits fall under this category. Customers having these accounts can withdraw their deposit s from the account at any time they desire.

Time/Term Deposits: -

Deposits, which are not payable on demand, are known as term or time deposits. "Term Deposits" or “Fixed Deposits” are deposits, where the depositor makes a lump sum deposit at one time for a fixed term and receives payment in future after the period for which the deposits have been kept. Rate of interest is contracted at the time of opening the account. Such deposits generally carry comparatively higher rate of interest depending on the time span In case a depositor wants prepayment i.e. payment before the due date, the amount is paid after leaving penalty.

Salient features of term deposits:

These deposits have a due date
It carries higher rate of interest
Interest is payable quarterly or compounded ever quarter as per the choice of the depositor.
Every deposit transaction is a separate contract
A time deposit receipt is not a negotiable instrument and, therefore, cannot be transferred by endorsement by a depositor in favour of another.
Banks accept term deposits for a minimum period of 7 days and maximum period of 120 months.

Deposits held under the following scheme are called time deposits.

1-Short deposit- Deposits accepted by banks for a period of less than 12 months are termed as Short deposits
2-Fixed deposit- Deposits accepted foe a period of over twelve months are treated as Fixed deposits.
3-Recurring deposits
4-Cash certificates


"Recurring Deposits” are like a Fixed Deposit Account. Banks introduce such deposit account to inculcate the habit of saving among people by offering higher rate of interest. Under such bank account, a depositor is required to deposit amount in pre-agreed equal monthly installments for a fixed period and the amount is paid in one lump sum, on maturity.

"Cash Certificates" are deposits, which are accepted in lump sum for a fixed period. On maturity, the principal plus interest compounded at quarterly intervals are repaid to the depositors as a lump sum. These deposits are issued a price less than the face value of the certificate for a certain period. On the date of maturity (which is mentioned on the certificate) the depositor gets the face value of the certificate.e.g if the face value of certificate is Rs.1,000/- and it is being issued say for a period of three years ,the bank may charge less than Rs 1000/- but the depositor gets the face value. The difference between the amount paid and received is the interest earned on the deposit.

Savings Bank Deposits:

Savings bank deposit account is primarily meant for developing the habit of saving among the public. Nominal interest is paid on the balance in the account. The depositor has the freedom to withdraw the amount deposited as and when he/she desires, however there are restrictions on the number of withdrawals over a period of time.
The interest on such deposits is calculated on daily product basis. The present rate of interest on Savings deposit is 4 percet per annum.Banks are now free to quote their own rate as RBI has deregulated interest on Saving deposits.
The relationship between the bank and the depositor is essentially that of "debtor and creditor" respectively.
Nomination facility is also available in such accounts.

Current Account:

Current account is generally opened for 'Trading' and 'Business' purposes. Current account is a form of demand deposit where withdrawals are allowed any number of times depending upon the balance in the account or up to a particular agreed amount.
This type of account, can be opened in a bank by any individual, business enterprise, company, government/semi-government organisation, etc. whose transactions happen to be numerous.

RBI directives prohibit payment of interest on current accounts. Banks do not pay any interest but levy some incidental charges depending upon the number of transactions.

Overdue Deposits:- Are those deposits which are not withdrawn on maturity dates. It is treated as a demand deposit

Dormant Account: - These are non- operative accounts. The accounts where no transactions has taken place during the consecutive four half years are termed as ‘Dormant’ account. Banks permit operations only after obtaining request letter from the depositor and ascertaining the reasons for not operating the account.

Opening of Account:

Application:

Application to open an account is made in Bank's prescribed account opening form. It is filled up personally, and signed in the presence of Bank’s authorized officer. In the account opening form/card the applicant must state his/her name, fathers/husbands name, full address, occupation, telephone number; PAN; date of birth in case of accounts of minors etc

Accounts can be opened singly or jointly in the names of two or more persons and may be made payable to:

Self in case of account opened singly.

In case of account opened jointly.

Any one or more of them,
Any one or more of the survivors,
Either or anyone or more of them or the survivors jointly, or survivor.
'Former or survivor 'or' latter or survivor', subject to the condition that the second/first named account holder respectively, will be entitled to the balance lying in the account only on the death of the former/latter account holder.

Who Can Open an Account?

Any person who is legally capable of entering into a valid contract can open an account. As the relationship between the bank and the depositor is that of “Debtor” and “Creditor”, the parties to the contract should be competent to enter into the contract.
According to Section 2 of the Indian Contract Act, 1872, every person is competent to enter in to contract if he /she -
(i) Is of the age of majority.
(ii) Is of sound mind, and
(iii) Is not disqualified from contracting by any law to which he /she is subjected.

Thus, any person, who is not a minor, lunatic or an un-discharged insolvent, drunkenness etc and is competent, to contract can open an account in his/her name with bank.

Exception:

A minor who has completed the age of-10-years and is able to read and write can open savings bank account in his personal name and can also operate his account. Maximum balance in such account not to exceed Rs.1, 00,000/- at any time. There is no limit to maximum balance for accounts of minors’ above-14-years.
A savings bank account can be opened in the name of minor jointly with his/her natural guardian i.e. father or guardian i.e. mother or both.

Introduction: -

For opening a bank account, introduction from someone known to the bank or a satisfactory reference is required so as to establish the identity and genuineness of the person/party in whose name the account is being opened. In the absence of proper introduction, the bank may not get the statutory protection under Section 131 of the Negotiable Instrument Act of 1881. Another important requirement of opening of an account is a photograph of the account holder(s).

Who can introduce?

(a) Bank officials
(b) By an existing account holder, of repute and standing whose account is satisfactorily and actively conducted.

(c) Any one of the following documents bearing photograph of the holder;

(1) Valid passport
(2) PAN Card
(3) Driving License
(4) Voters ID card
(5) Defence ID Card
(6) Identity card of employees of Central/State Govt. & Public Sector undertakings.
(7) Senior Citizen’s Card

Banks take only original valid documents for verification and verify the photo affixed on the account opening form/card and the address of the account form and the document presented for identification.

Nomination:

Banks ask their account holders to make nominations, which mean that they should nominate persons to whom the money lying in their accounts should go in the event of their death. Nomination can be made in account opening form itself or on a separate form indicating the name and address of the nominee. The account holders can change the nomination any time.
Standing Instructions:
These are the the instructions given by a customer to his banker to pay a person or an organization a certain sum of money at regular intervals by debit to his/her account. For example, customers may give standing instructions to pay insurance premium on due dates or remit a certain sum of money for credit to some other account, etc. In case a bank fails to comply with the instruction after it has been received, it will be liable for the damages.
Closing of Account:
An account holder can close the account after applying in writing to this effect to the bank. A banker is not entitled to arbitrarily close any account. However, in case of unsatisfactory transactions, the banker has right to close the customer‘s account after giving him a reasonable notice.
When an account is closed, all unused cheque forms are required to be returned to the bank.

Deposit Insurance:

Insurance of bank deposits is intended to protect the interest of depositors, on account of failure of banks. After the banking crises in Bengal in the year 1948 the concept of insuring deposits kept with banks received attention for the first time. The question came up for reconsideration in the year 1949, but it was decided to hold it in abeyance till the Reserve Bank of India ensured adequate arrangements for inspection of banks.
After the crash of the Palai Central Bank Ltd., and the Laxmi Bank Ltd. in 1960,serious thought to the concept was, given by the Reserve Bank of India and the Central Government. The Deposit Insurance Corporation (DIC) Bill was introduced in the Parliament on August 21, 1961. After it was passed by the Parliament, the Bill got the assent of the President on December 7, 1961 and the Deposit Insurance Act, 1961 came into force on January 1, 1962.
The scheme is now being administered by Deposit Insurance and Credit Guarantee Corporation of India Ltd. (DI & CGC).

The scheme of deposit insurance infuses protection and confidence in the depositors.

Deposit Insurance and Credit Gurantee Corporation (DI & CGS):

The Government of India introduced the scheme on 1st April 1981 in lieu of the earlier Credit Guarantee Scheme, which came into force on January 1, 1962

The scheme provides a measure of protection to eligible credit institutions against possible losses in respect of their advances to small scale industries and loans to other small borrowers like artisans, self employed persons, satisfying RBI criterion. It also provides insurance to banks giving protection to small depositors. The eligible credit institutions include — Commercial Banks, Regional Rural Banks, Co-operative Banks, State Financial Corporations and certain State Industrial Development Corporations, etc.

The DICGC insures all deposits such as savings, fixed, current, recurring, etc deposits except the following types of deposits.
(i) Deposits of foreign Governments;(ii) Deposits of Central/State Governments;(iii) Inter-bank deposits;(iv) Deposits of the State Land Development Banks with the State co-operative bank;(v) Any amount due on account of and deposit received outside India(vi) Any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India
Each depositor in a bank is insured up to a maximum of Rs.1, 00,000 (Rupees One Lakh) for both principal and interest amount held by him in the same right and same capacity as on the date of liquidation/cancellation of bank's Licence or the date on which the scheme of amalgamation/merger/reconstruction/reconstruction comes into force
The DICGC is liable to pay to each depositor through the liquidator, the amount of his deposit up to Rupees one lakh within two months from the date of receipt of claim list from the liquidator.
If a bank is reconstructed or amalgamated / merged with another bank, the DICGC pays the bank concerned, the difference between the full amount of deposit or the limit of insurance cover in force at the time, whichever is less and the amount received by him under the reconstruction / amalgamation scheme within two months from the date of receipt of claim list from the transferee bank / Chief Executive Officer of the insured bank/transferee bank as the case may be.

Banking Instruments

What is Negotiable Instrument ?

According to Sec. 13 of Negotiable Instruments Act, 1881, A Negotiable Instrument means a promisory note, bill of exchange, payable either to order or bearer.

Features:

It is easily transferable from one person to another ownership / right passes merely by delivery.It passes good title to the transferee even if the transferor had bad title ,provided the person receiving the instrument has accepted the instrument in good faith,and had no reason to believe that the title had any defect.( In case of goods, a person can not get better title than the transferor .However, this is not the case with Negotiable instrument. )

Types of Negotiable Instrument:

By Statute: ie what has been mentioned in Sec. 4,5,6 of Negotiable Instruments Act.
By practice/Custom: Viz., Government Promissory Note, Railway Receipt, Bill of Lading, Air Way Bill etc.
Who is a Holder ?


According to Sec.8 of N I Act ., a holder is a person who in his own name is entitled to the possession of the instrument, and to receive or recover the amount due from the parties to the instrument.

Promissory Note: -

As per Sec.4 of N.I.Act, 1881” Promissory Note is an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking signed by the maker to pay a certain sum of money only or the order of a certain person, or to the bearer of the instrument.”
The promise can be singly or jointly by more than one person.

There are two parties in a Promissory Note

Maker- Is the person who promises to pay
Payee – Is the person to whom promise is made


SPECIMEN

Place
Date

Three months after date I promise to pay to --------------------the sum of Rupees---------------------------value received.


Stamp
Signed
-----------------------------------------------------------------------------------

Place
Date
On demand I promise to pay to------------------------------ the sum of Rupees---------------------------------Value received.


Stamp
Signed

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Essential requirements of a Promissory Note:

It must be in writing .It must contain an unconditional undertaking to pay
The maker should sign it
The promise to pay should be unconditional
The promise to pay money and money only
Maker should be certain
It must contain the name of the Payee – it can not be bearer i.e. the person to whom the amount is to be paid has to be mentioned { a bearer promissory note gets the status of a currency note.-prohibited by Sec.31 of Reserve Bank of India Act,1934}
It should bear the date and place of issue
It can be payable on demand i.e. sight or after a certain period
It is not necessary to mention the consideration i.e. “Value Received”
It cannot be tied up with any future event
It attracts stamp duty under Stamp Act.1899.

According to Sec.1 Article 49 Stamping can be done prior to execution or after execution

Note:- The question is why a person undertakes to pay?.He promises to pay because he owes money.The relationship is of Debtor and Creditor.
Banks take Demand Promissory Note ( DP Note) from borrower. In addition to principal amount ,It also contains interest clause ie interest @ ----% per annum with monthly/ quarterly/half yearly rest.

Bill of Exchange: -

As per Sec.5 of N.I.Act, 1881 “ A bill of exchange is an “Instrument” in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of certain person or bearer of the instrument.”


SPECIMEN
Place
Date
Rs.--------------

At sight pay to the order of … …………… the sum of Rs.------------- for value received.

Stamp
Signedbythe Maker

To
Mr./ M/S…………………….
Address


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Place
Date
Rs.---------------------

-------------Months after date pay to the order of……………………..

the sum of Rs……………….value received.

To
Stamp
Mr./M/s. Signed by the maker
Address
Accepted


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The Drawer /maker gives direction to the drawee because he owes money to the drawer or there is some consideration.

Essential Requirements of bill of exchange:

It must be in writing
There are three parties to the Bill of Exchange
– Drawer or Maker
– Drawee – The person on whom the bill is drawn
– Payee – To whom the payment is to be made. Payee is the person whose name is mentioned in the instrument, to whom or to whose order the money is directed to be paid by the instrument.
It should be an unconditional order to pay
It should be signed by the maker/drawer
It must contain direction to a certain person (i.e. drawee) to pay
The sum payable must be certain
Drawee must be certain
It is direction by the drawer / maker to a person (i.e. drawee) to make payment to a definite person or as per his order or to the bearer of the instrument.
Payee must be certain

Bill of Exchange can either be Sight or Usance. Usance bills contain a specified period on which the payment is to be made. Usance bills need acceptance of the payee. Three days of grace is given for payment of usance bills.

Dishonour of Bill of Exchange :

A negotiable instrument can be dishonoured in two ways
· By non payment
· By non acceptance ( Does not allpy to Cheque)

Options available to holder:

With a view to safe guarding his interest, the holder has two options

· To give notice of dishonour to all parties
1- ie maker of promissory note.
2- The acceptor or drawer of bill of exchange
· To get the dishonoured bills noted and protested

Noting :

Notary public makes a demand for payment to the drawee or acceptor for acceptance of the bill. In case the drawee refuses to pay or the acceptor refuses to accept ,he makes noting on the bill and specifies the reasons for dishonour, and the date of dishonour. Once the recording of dishonour has been on the instrument the Notary Public issues a certificate which is called as protest.

A cheque is not noted and protested.

Cheque:

As per Sec. 6 of NI Act, 1881 “ a cheque is a Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.”

It is an instrument in writing containing an unconditional order signed by the maker, directing a certain banker to pay a certain sum of money, on demand to, or to the order of, a certain person or to the bearer of the instrument. All cheques are bill of exchange, but all bill of exchange are not cheques.

Difference between a cheque and a bill of exchange: -

A cheque does not require acceptance
It can be crossed
Does not attract stamp duty.
It gets statutory protection under Sec. 85 and Sec. 131 of NIAct.
It is not entitled to days of grace
A cheque is presented for payment, whereas a bill in the first instance is presented for acceptance unless it is a bill on demand.
No notice of dishonour is required
A cheque is not noted or protested


SPECIMEN OF A MICR CHEQUE


-------------------

Pay-------------------------------------------------------------------------------- or Bearer

Rupees------------------------------------------------------------------------



Union Bank of India
B.S.Marg,
Mumbai
A/C No
LF Intl

-----------------------------------------------------------------------------
229859 22 6 026 010 10 Transaction Code
ChequeNo. Citycode Bank code Branch Code

------------------------------------------------------------

MICR Cheques:

Due to introduction of electronic clearing system in all major cities banks are issuing MICR cheques {Magnetic Ink Character Recognition}. This helps in speedy clearing of cheques in the clearinghouses and without much human intervention. A t the bottom of the cheque there is a code line known as “Band”. It contains information in magnetic ink, which is required for mechanical processing of cheque. Cheques are not to be signed and nothing is to be written on the band. It contains

First six digits indicate cheque number.
Next three digits indicate city code number
Next three digits indicate bank code number
Next three digits indicate branch code number
Next digits indicate transaction code i.e. SB/Current/Cash Credit etc.

There are 59 MICR processing centres .These centres account for 83-85% of total chrque volume and amount. Switching over from paper based clearing to truncated cheque clearing system is presently at Delhi.

Essential requirements of a Cheque:

A cheque is always payable on demand.
It is drawn on some specified bank.
It is the only negotiable instrument on which the rules of crossing are applicable.
No acceptance is required on cheque.
A cheque has to be written on the prescribed format of the bank and to be drawn on the chequebook provided by the bank.
It should be dated.
There are three parties to the cheque
1-Drawer or Maker
2-The bank - on whom the cheque is drawn (i.e. the bank with whom the account is maintained by the drawer)
3- Payee – Payee is the person whose name is mentioned on the cheque

towhom or to whose order the money is directed to be paid.

It should be an unconditional order to pay
It should be signed by the maker/drawer
The sum payable must be certain
Payee must be certain
Payment of cheque is subject to drawer having sufficient balance in his account or can be overdrawn under arrangement.

Digital Cheque:

Vide, the Negotiable Instrument (Amendment & Miscellaneous Provisions) Act 2002 important amendments have been made to certain provisions of the Negotiable Instrument Act.

The amendment has brought in two concepts of digital cheques.

1.One is a "mirror image" of a cheque digitally signed.
2.Second is the concept of "truncated cheque" where the physical cheque carrying a physical signature of the drawer is replaced with an image of the signed cheque. Power to create a truncated cheque lies with the clearinghouse or by the paying or collecting banks.

Amendment in the act replaces the original section 6 of the parent Act (NIA) to read as follows.

A "Cheque" is a ‘Bill of Exchange’ drawn on a specified banker and not expressed otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

Electronic form of Cheque:

"a cheque in the electronic form" means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric cryptosystem.

Truncated Cheque:

"a truncated cheque" means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

Clearing House:

The expression-clearing clearing house" means the clearinghouse managed by the Reserve Bank of India or a clearinghouse recognized as such by the Reserve Bank of India.
When a cheque is truncated, the paying banker is entitled to demand further information in case of a reasonable suspicion (section 64 of NIA), the Collecting Banker can retain the truncated cheque even after receiving the payment (Section 81 of NIA), the difference if any between the image and the truncated cheque will be considered a "Material Alteration" (Section 89 of NIA), and the Collecting Banker is responsible to verify that the truncated cheque is prima-facie genuine (Sec 131 of NIA).

A cheque can be

1. Ante- dated: Issued on some previous date.

Antedate is a business term to date a document before the date on which it is drawn up. This is not necessarily illegal or improper. A bill is not invalid by reason only that it is ante-dated or post-dated, or that it bears date on a Sunday. A cheque which bears a date before the date of issue is an ante dated cheque. As per Sec. 74 (4) (ii) of NI Act, a cheque presented for payment within a reasonable period of time after its issue ie within six months of its issue will be honoured by bank. A banker is not concerned whether the cheque was ante dated or not.he is only concerned that it is not stale.

2. Post dated: Issued for some future date
3. Stale: Which is out of date more than Six months old

Why post dated cheques are issued?

In those cases where the drawer has not enough funds in his account for meeting his obligations ,he issues post date cheques after taking into account the availablity of funds on some future date in his account.
When under arrangement with the payee ,payment is deferred for some specific future period ie in the event of payment of Loan instalment,under hire purchase arrangements.

Advantages:

Avoids embrassement arising from dishonour and payee taking action under Sec. 138 of NIAct.
Maintaing proper fund flow / management
Saving interest on borrowings or earnings on funds held in account
Meeting immediate fund requirement for other important purposes.

Liability of a paying banker- Payment of Cheque :

· A banker honours the cheques of customers up to the credit balance held in the account or as per arrangements with the bank. The duty of banker is to see that
· The cheque is in the proper form
· Signatures of the person authorised to issue cheque tallies with the specimen signature recorded with the bank
· The cheque is neither stale nor post dated
· Amount mentioned in words and figures are same
· The drawer authenticates material alterations if any.
· Endorsement is proper.
· Cheque is not mutilated
· Crossed cheques are not paid at counter
· Cheques are paid only in banking hours.

Circumstances under which a bank can refuse payment of a cheque:

· If the customer has stopped payment of the cheque
· If bank has notice about the death of customer
· If he has information /notice about the insanity of the customer
· If he has notice of customer’s bankruptcy
· If bank has knowledge of any defect in the title of the person presenting the cheque.
· Notice of garnishee order
· In case of trust account, if the customer contemplates breach of trust.

Dishonour of Cheque.

. A bank can refuse payment of a cheque
1. If it is stale,post dated, mutilated
2. amount in words and figure differ.
3. If there is insufficient balance in the account
4. if the arrangements made with the bank (Over Draft, Cash Credit limit)exceeds
5. If instead of payee’s name word “ Cash “ is mentioned
6. If a crossed cheque is presened at the counter.
7. If signatures are forged.
8. If there is material alteration

Material Alteration:

· Alterations which changes the fundamental character and spirit of the instrument
· Changes the rights and liabilities of the parties to the instrument
· Changes legal character of the document
· Changes made after the cheque has been issued

According to Sec. 87 of NIAct. ,if a cheque is materially altered it can not be regarded as cheque .It includes

· Change in date
· Change in amount
· Alteration in crossing –or cancellation
· Alteration of word order to bearer
· Alteration of place of payment.
· Alteration in the names of the parties or relationship between them.

Unless alterations are authanticated by the drawer, banks do not pay /honour materially altered cheques .However, in following cases alterations do not require authantication by the drawer

· Conversion of blank endorsement to full
· Conversion of general crossing to special crossoing
· Filling of blanks in the cheque
· Crossing of uncrossed cheque

Dishonour of cheque issued for settlement of debt:

As per sec.138 of N.I.Act dishonour of cheque issued by the drawer towards discharge of his debt or other liability is an offence, and he can be punished with imprisonment for a term, which may extend to two years or with fine, which may be up to twice the amount of cheque or both. Provisions of sec.138 would also be applicable in case a cheque is dishonored because ‘Stop payment’ instructions have been given to bank.
Once the cheque has been issued by the drawer to the bank/ payee, merely because the drawer issues a notice to the drawee or to the bank for ‘stop payment’, it will not preclude an action under section 138 of N.I.Act,{ Modi Cement Ltd’ Vs.KuchiKumarNandi(1998) ,28 CLA. 491(SC)/JT1988(2)SC198}

Prerequisite:

1. Cheque to be presented within the validity of the period i.e. within 6 months. It should not be stale.
2. In case of post dated cheques, the period starts from the date of the cheque
3. In case of dishonour, the payee has to give notice to the drawer.
4. The payee or the holder in due course on receipt of intimation from bank about dishonour has to give notice to the drawer within 30 days of the information from bank.
5. if payment is not received within 15 days of the notice, provisions of sec.138 would be applicable.
6. The complaint is to be lodged in writing before a Metropolitan Magistrate or a Judicial Magistrate of the First Class within one month of the expiry of 15 days of receipt of notice to the drawer. (Magistrate is empowered to condone delay in filing complaint)
7. There is no minimum time limit for filing the complaint.
8. if the dishonour is due to the reason “ Account Closed” it would amount that there was no sufficient balance in the account.

As per Section 146, inserted in N.I.Act, by the Amendment Act 2002, banker’s slip or memo having bank’s official mark denoting that the cheque has been dishonored shall be presumed to be the fact of dishonour,and will be treated as prima-facie evidence. The court, on production of bank’s slip or memo having therein the official mark denoting that the cheque has been dishonoured, shall presume the fact of dishonour of such cheque, unless and until such fact is disproved.
The usual practice followed by the court of calling the drawee bank’s person as a witness to prove the fact of dishonour has been dispensed with. Now it is for the accused /drawer to prove that there were sufficient funds in the account or that the cheque was not returned for reason” insufficient funds” or any other reason.

Crossing of Cheques:

There are two types of crossing
· General
· Special

General crossing:

As per Sec123 of N.I.Act, where a cheque bears across its face an addition of the words "and company " or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words " not negotiable," that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally.

Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker (Sec.126).

Special crossing:

As per Section 124 of N.I.Act, where a cheque bears across its face an addition of the name of a banker, either with or without the words " not negotiable," that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker
.
Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection (Sec.126).

A person taking a cheque crossed generally or specially, bearing in either case the words " not negotiable," shall not have, and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had (Sec.130).

Endorsement:

According to Sec.15 of N.I.Act, when the maker or holder of a negotiable instrument signs the same,( not in the capacity of maker or drawer) on the back of the instrument it is known as indorsement .The purpose is to transfer /give instrument to another person. In case the space on the back of the instrument is insufficient, it can be signed on a paper attaches/pasted on the back of the instrument. The attachment is known as along.
As per Sec 16.1 (1) of NIAct, endorsement can be

· Blank
· Full

Blank: If the endorser signs his name only, the endorsement is said to be " in blank,"
Full: If the endorse adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the indorsement is said to be " in full “.

Banking System in India:

As per the Reserve Bank of India Act, 1934, banks in India are classified into two major categories i.e. scheduled and non-scheduled banks. A scheduled bank is one whose name appears in the second schedule of the RBI Act, 1934. It includes those banks, which have a paid-up capital and reserves of an aggregate value of not less than Rs.5 lakhs and which satisfy RBI that their affairs are being carried out in the interests of the depositors. While, non-scheduled banks are those, which have not been included in the second schedule of the Act.
The scheduled banks comprise scheduled commercial banks and scheduled cooperative banks. The scheduled commercial banks in India are categorised into following different groups according to their ownership and/or nature of operation: -

(i) Nationalised Banks
(ii) State Bank of India and its associates;
(iii) Regional Rural Banks (RRBs);
(iv) Foreign banks; and
(v) Other Indian private sector banks
(vi) Local Area Bank.

Scheduled Co-operative Banks consist of

(i) Scheduled State Co-operative Banks and
(ii) Scheduled Urban Co-operative Banks.
Banks in India are controlled, supervised and regulated by Reserve bank of India. Banking structure in India can be broadly classified as under
Central Banking
Commercial Banking
Development Banking (Development Finance Institutions)
Non-Banking financial Institutions
· Merchant Banking

Banking structure in India

Reserve Bank of India Development Banks

EXIM Bank
SIDBI
NABARD Commercial Banks

Scheduled Banks Non-Scheduled Banks

Indian Banks Foreign Banks-Branches-Representative Office

Dist. Co-operative Banks
State Co-Operative Banks

Public Sector
Private Sector
State Bank of India & It’s Associate Banks
Nationalised Banks
Regional Rural Banks

New Generation Banks
· Local Area Banks
· Old Banks

Non Banking Finance Companies
Merchant Banking

Other Financial Institutions
· Land Mortgage Banks
· Industrial Finance Corporation
· Agriculture Refinance Corporation
· State financial Corporation
· The Industrial Reconstruction Bank of India
· Credit Guarantee Corporation of India
· The Deposit Insurance Corporation
· The Export credit and Guarantee Corporation
· Industrial Development Finance Corp.
· Industrial Investment Bank of India
Note:
There are 19 Nationalised Banks.
State bank of India and its associate banks are 8 in numbers.
There were around 196 Regional Rural Banks which were established in each district of the country in partnership with Central Government ( 50% Capital Share) State Government ( 15% Share capital) Sponsor Bank ( 35% capital share).As per the directives all the Regional Rural Banks established by a bank in a state have now been merged and made as one unit.
Old Private sector Bank – Example- Bank of Rajasthan,Nainital Bank,
New Generation Banks – Example- UTI Bank, IDBI Bank,YES Bank. ICICI Bank etc.,
Foreign Banks –Example- ABN Amro, Chartered Bank, ANZ Bank, HSBC etc.

Reserve Bank of India the Central Bank of the country was established on April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act, 1934. .

Non-Banking Finance Companies:

According to Reserve Bank (Amendment Act) 1997. “A Non Banking Finance Company Means (NBFC)
A financial institution, which is a company;
A non-banking institution or class of which has its principal business the receiving of deposits under any scheme or arrangement or in any other manner or lending in any manner;
Such other non-banking institution or class of such institutions as the Bank may with the previous approval of the Central Government specify
Non Banking Finance Company include those finance companies, which are in the business of
Hire Purchase Finance
Housing Finance
Investment
Loan
Equipment Leasing
Mutual benefit financial companies.

Merchant Banking:

Merchant banking is a skill-based activity and involves servicing every need of the client. Merchant banking activities include issue and underwriting of shares and debentures. Merchant Bankers activities are regulated by ;
Guidelines of Securities and Exchange Board of India (SEBI).
Companies Act, 1956
Listing Guidelines of Stock Exchange
Securities Contracts (Regulations) Act, 1956

Audit and Inspection

Why Inspection?

Banking is predominated human resources service industry. Its efficient functioning largely depends upon its human resources. Though competitive environment has compelled banks to computerize their operations for meeting customer expectations and to provide efficient services, human factor continues to dominate and play important role in the industry.
Credibility of an institution, particularly that of financial institution depends on its internal control and supervision mechanism which can promptly detect irregularities, if any, and take corrective measures and ensure non recurrence of irregularities .

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 organisation which remains undetected for an indefinite period or long time “. Therefore, system of Inspection and Audit is necessary for taking care of this aspect.
Inspection and Audit plays crucial role in success of banking operations. It helps in toning up the operations and at the same time helps in plugging leakage in income.

Objectives of Internal Audit/Inspection:

The overall objective of internal audit/inspection is to help bank management in achieving efficiency and effectiveness in all operations. It enables bank management in finding out that the branch/office of the bank is functioning soundly from financial and organizational point of view. It provides management an in sight into the seismic activities going on in a branch/office/department, which may adversely affect bank’s interest.

What is auditing?

Auditing involves gathering and assessment of factual information from various sources. Auditing, in general, is described as:
"The independent examination of records and other information in order to form an opinion on the integrity of a system of controls and recommend control improvements to limit risks".
Auditing is essentially a review of financial records by an independent person, whether the financial statements exhibit true and fair picture in accordance with the accepted principles of accounting and as per the applicable legal requirement.
Purpose of Audit :-
The purpose of audit is to ensure that
1. All assets and liabilities of a bank are properly recorded.
2. All income to which the bank is entitled is received and recorded in the proper income account.
3. All expenses are properly accounted for.
4. To enquire into the various aspects relating to frauds and malpractices in banks.
5. Internal control system is properly implemented and is in force at the branches.
6. Periodical control returns are submitted to the controlling offices.
The function of auditing is to make sure that controls are maintained and that proofs are accurate. A well - conceived and carefully executed control and audit programme will "protect weak people from temptation, strong people from opportunity, and innocent people from suspicion:"(Marshall C. Cons, Bark Auditing –Cambridge, Mass.: Bankers Publishing Company, 1955).

Purpose of Inspection: -

Inspection is a crucial element of direct control mechanism over branches by bank management. It is generally done once in every 12 months. The main purpose of internal inspection is to scrutinise working of the branch and various departments of the bank with objective to help the bank in keeping a watch on safe and useful deployment of funds.
It ensures that the operating units scrupulously follow the laid down systems and procedures and if found otherwise, to initiate prompt corrective steps.
Inspection is not a faultfinding mechanism but is a developmental tool. It is an early warning signal system for undesirable trends in operations. It is a whistle blowing mechanism.
Inspection and operations go hand in hand and do not function parallel. The ultimate objective of inspection is to ensure that functioning of branches are sound both at financial and organizational level. Inspection serves as ears and eyes of management and at the same time acts as a friend, philosopher and guide to the operating staff.

Inspecting officers are the watchdogs and not the bloodhounds. Reporting of irregularities, inadequacies and deviations are their main objectives, but playing a supportive role to ensure realization of corporate goals is equally important. Inspection report is the most comprehensive document under Management Information System, which provides essential feed back to the management.

Difference between Audit and Inspection: -

The expression “ Audit and Inspection ” are many times synonymously and interchangeably used.
Audit - It is quantitative analysis of the operations of an organization. It is essentially a review of financial records by an independent person. It is an activity, which ensures that correct accounting principles, systems and procedures have been followed. Proper and due provisions have been made and that the books of accounts represent correct, true and fair picture of the affairs of the organisation. Its basic purpose is to assess the integrity of books of accounts and records.
Audit is a statutory requirement. Bank’s financial results cannot be treated as correct unless certified by auditors’ i.e. Chartered Accountants. The board adopts financial results only when they are certified and signed by auditors
.
Audit is done by outside qualified auditors, whereas inspection is done by bank’s internal team having experience in bank’s operations .In exceptional / special cases inspection is also assigned to professionals outside the bank .In some banks audit nomenclature is also used for special inspection activities carried out by internal team.
Inspection: - It is one of the important tools for controlling the affairs of bank and also judging the efficiency of management. It is a multi purpose function, which gives feed back to the upper tier of management about the affairs of bank. It is the physical verification of transactions. It includes all the elements of audit. It is a qualitative review of the entire affairs of a branch. It is a mechanism, which helps, in overall improvement in the working and efficiency of the branch.

Extent and Scope of Inspection:

The system of internal control is not restricted only to the functions of the accounting and financial aspects but extend beyond these matters. It provides assurance to the management as to the adequacy of its audited procedures and the extent to which they are being effectively carried out. It is a qualitative review of entire operations both at operational level, managerial and supervisory level. If the operations deviate from the prescribed procedures, rules and regulations, the internal control puts the management in psychic quarantine.
A good internal control system ensures that no one person is in a position to make significant errors or perpetrate significant irregularities eluding timely detection.
Inspection helps in identifying seismic activities undergoing in a branch, which lead to catastrophe in other operational areas.
The overall objective of Inspection is to have flawless operations as per the directives and guidelines. However, some of the major objectives are mentioned below .It is not a comprehensive list.
· To assess whether the performance of the branch is in consonance with the policy guidelines, budget, as per market trends.
· To ascertain whether laid down systems and procedures are scrupulously followed.
· To examine the books of accounts, registers and records with a view to ensure that they are maintained in accordance with the systems as prescribed.
· To provide management information to controlling authorities for taking corrective measures and for deciding policies.
· To physically check cash, securities and other tangible valuables and ascertain that they are in order and in agreement with other books of accounts, records and registers.
· To ascertain whether the advances sanctioned are within the discretionary lending powers and if not whether due sanction was obtained. Whether all the terms and conditions have been complied with and due diligence taken.
· Whether documentation is proper and as per the term of sanction.
· To find out whether health of advances portfolio is improving or deteriorating. Whether Non performing assets are increasing or reducing, Whether slippages are under control, Whether recovery is up to date, whether compromises have been done as per bank’s guidelines. Whether one time settlement is as per bank’s guidelines or not.
· Whether guidelines issued by Reserve Bank of India and other statutory authorities are being followed.
· To ascertain whether periodical returns both internal and statutory are correctly submitted at the stipulated intervals.
· To examine whether expenses incurred are as per authority. Whether discretionary authority is judiciously utilized. In case authority is exceeded whether action is got confirmed and approved from the competent authority.
· To ascertain whether income is properly booked. Is there any leakage of revenue? Whether charges are levied as per banks directives.
· To assess productivity and profitability of the branch.
· To see whether there is inefficiency or dereliction of duties at various operational levels.
· To evaluate the quality of service, staff relations, at the branch.
· To examine lay out, ambience, ergonomics and location of branch from business prospects and suitability.

Submission of Reports: -

After the inspection is over, inspecting officer submits a detailed descriptive report to the branch on its functioning. The inspection report specifically comments, on the irregularities observed during the course of inspection. The inspection/audit officials have to critically analyse and make in-depth study of the corruption/fraud prone areas such as appraisal of credit proposals, balancing of books, reconciliation of inter-branch accounts, settlement of clearing transactions, suspense accounts, premises and stationery accounts during the course of inspections leaving no scope for any malpractices/irregularities remaining undetected.
A copy of the report is also submitted to the controlling authorities of the branch. In case irregularities of serious nature are observed, needing prompt and immediate attention of the branch as well as of controlling authorities whose rectification can not wait finalization and submission of report, special communication is sent both to the concerned branch and its controlling authorities for taking action on war footing.
In some banks in addition to preparation and submission of descriptive reports,
numerical rating on various functional areas and aspects is also given .The rating is done on a predetermined and prescribed scale. On the basis of which branches are rated on performance quotient/ assessment factor.

Rectification of Irregularities: -

All the irregularities pointed out in the report are to be rectified within a specified time schedule. Branches have to submit confirmation to this effect to their controlling authorities in the form of a clean rectification certificate. In those cases, where rectification of an irregularity may take longer period, claused rectification certificate is submitted with details of the irregularities yet to be rectified and action initiated towards the rectification. Branches have also to submit detailed comments on the various observations of inspecting officer mentioned in the report.

Types of Inspections and Audit in banks: –

Audit and Inspection are the most commonly used components for achieving the objectives and for ensuring cohesiveness of actions. It is a tool for ascertaining commonality of purpose at all levels of the organization. Banks are presently subject to following kinds of inspection and audit.

1. Inspection of operating units. -

Inspection department of bank carries out regular inspection of both General and Specialised branches. The emphasis is on adherence to procedures, execution of documents and control of expenditure and realisation of revenue. Generally inspection of a branch is done once in 12 months. However, in special circumstances, inspection of a branch is done even within a period less than 12 months.

2.Special inspections carried out internally

Credit Audit
Snap audit
Quick audit
Revenue inspection / audit
Short Inspection
Human Resource Audit
Technical Inspection
Investment portfolio Audit

1.Credit Audit: -

The Narang Committee constituted by Reserve Bank of India suggested for “ Credit Audit “ in banks. Thereafter, Reserve Bank advised that banks should ensure review mechanism for larger advances (loan). Accordingly. Credit portfolio audit was implemented in banks. The audit focuses both on new accounts and accounts transferred.
The audit focuses on larger advances and group exposures. It also scrutinizes high value accounts shifted to the bank along with executives/officials and the accounts transferred from other branches along with the officials.
This audit is done soon after the sanction of advances. The purpose of the credit audit is to facilitate better credit administration
Credit Audit helps in
· Improving in the quality of credit portfolio
· Reviewing sanction process and compliance status of large advances.
· Obtaining Feed back on regulatory compliance.
· Independent review of credit risk assessment.
· Picking up early warning signals and in suggesting remedial measures
· Taking corrective actions for improving credit quality, credit administration and credit skills of staff.

2.Human Resource Audit: -

It helps in enforcing discipline and punctuality at branch/office level. It is a mechanism to review the compliance of various service rules /regulations governing human resources. It also maintains compliance of statutory labour requirements. It helps in reducing risk of liabilities arising from non-compliance of labour requirements and misinterpretation of rules and regulations. It plays a vital role in instilling a sense of confidence in management of Human Resources related issues in the bank.

3.Revenue Audit:

Generally the Revenue audit is conducted in large branches. It is done unearth leakage of income and to find out the reasons. Banks do in-depth examination and take corrective measures. Action is also taken against the officials responsible for the lapses.

4.Short Inspections:

Banks conduct surprise short inspections at irregular intervals, particularly of large branches, not only to look into the general working of the branches but also to ensure that no malafide practices are being indulged in to by the branch officials. In addition wherever so warranted, spot/special inspections or scrutiny are also carried out on receiving signals to that effect.

5.Investment Portfolio Audit:

In view of the possibility of abuse, purchase and sale of government securities etc., the internal audit department periodically checks the reconciliation of the balances of SGL transfer forms as per bank’s books.

The internal auditors (Chartered Accountants/Statutory Auditors in the absence of Internal Auditors) who audit the treasury operations also scrutinises that::
· Aggregate upper contract limit for each of the approved brokers is within the limit of total transactions (both purchase and sales) entered into by the bank during a year.
Disproportionate part of the business is not transacted through only one or a few brokers and that aggregate contract limits for each of the approved brokers are not exceeded.

Inspection by Reserve Bank :

The basic objective of inspections by the Reserve Bank of India is to protect the interests of banks and their depositors through maintenance of sound banking system and to ensure that banks function as per the laid down guidelines, policies and instructions issued from time to time.
As per the provisions of Banking regulations Act 1949 and the Reserve Bank of India Act 1934, extensive powers of Supervision, regulation and control over commercial banks vested with Reserve bank of India with a view mainly to
· Ensuring solvency of the banking system, quality of assets, adequate liquidity and profitability.
· Watching adherence to statutory and regulatory requirements.
· Enforcing implementation of socio-economic policies and developmental objectives of the Government/ Reserve Bank.

Inspection of Banks is the most significant supervisory function exercised by the Reserve Bank of India. The basic objectives of inspection of banks are to safe guard the interest of depositors and to build up and maintain a sound banking system in conformity with the banking laws and regulations as well as the country’s socio-economic objectives. Accordingly, inspections serve as a tool for overall appraisal of the financial and managerial systems and procedures of the banks, toning up of their procedures and methods of operations and prevention of serious irregularities.

Reserve Bank conducts inspection of banks to

1. Assess the quality of management including the Board of Directors and the Chief Executive Officer.
2. Determine the adequacy or otherwise of the organisational structures so as to meet the emerging needs of the institution.
3. Find out the adequacy and effectiveness of internal control machinery so as to focus attention on weaknesses that require remedial actions.
4. Identify areas, practices, procedures, policies and methods of operation, which require corrective action with a view to improving the quality of performance.
5. Assess the performance in the matter of achieving the declared social objectives.
6. Make an overall assessment of the bank’s financial position & solvency.
7. Appraise its assets including advances with a view to ascertaining whether the criteria of safety and liquidity are maintained properly.
8. Whether the instructions of the Reserve Bank and the provisions of law including Foreign Exchange Regulations are being followed?
9. Whether FEMA stipulations are adherence to?
Difference between RBI inspection and Internal & External Audit
The inspection by the Reserve Bank of India differs from Internal & External Audit.
· Inspection/ audit is one of the important measures employed by the management to supervise and control the working of the branches.
· The Internal & External Audit is primarily concerned with ensuring that the policies, practices and procedures followed by the branches are in conformity with those prescribed by the management from time to time.
· The external auditors are independent of the bank and its management. They are appointed as per the provisions of law to express an opinion on the annual accounts.
· The job and responsibility of external auditor is essentially to certify the accuracy of the accounts and to ensure that the balance sheet gives a true and fair view of the state of affairs and that the profit and loss accounts exhibits a true and fair view of the profit and loss. In the process, the auditor has to verify and satisfy himself that the advances made by the bank are good and recoverable and, if not, whether in his opinion, the provisions made for bad and doubtful debts are adequate.
· During the course of an inspection conducted by the Reserve Bank, an evaluation of advances is made and the extent to which debts have become bad or doubtful and whether as per the judgment of Reserve Bank have been correctly arrived at .It is a part of the exercise for arriving at the real value of the banks’ paid up capital and reserves.
· RBI Inspection appraises the competence, adequacy and effectiveness of the internal inspection/audit machinery and assesses the quality of management.

· Activity specific inspection -Audit carried out by the Accountant Generals Office to determine whether transactions undertaken on behalf of the Government are in accordance with rules and regulations. The audit focuses on pension payments and remittances to Government accounts (i.e. collection of custom, excise duties etc.)

· Management Assessment Related
Management Audit
· Statutory obligation specific
· Statutory Audit-
· Concurrent Audit

Statutory Audit-

Banks have to close their books of accounts every year as at March 31st and prepare a Balance Sheet and Profit and Loss account as prescribed in the III rd schedule to the Banking Regulations Act.
As the name suggests this audit is compulsory by law. The law also laid down the periodicity of audit, the qualification of person who can carry such audit, and to whom the audit report is to be addressed. The rights and duties of a statutory auditor are governed by the statute by which such audit is made compulsory. It cannot be changed by company or its shareholders or by any other person. Only a practicing Chartered Accountant who is a member of Institute of Chartered Accountants of India (ICAI) can carry out statutory audit. For companies incorporated under Companies Act, 1956 duties of auditors are prescribed under Section 224 to 233. This audit is undertaken by a practicing Chartered Accountant, annually of the financial statements, in accordance with the provisions in the Banking Regulations Act, 1949. The report of statutory auditor is required to be placed before “General Meeting “ of the company’s shareholders. The Statutory auditor presents its report to the Board of the bank, which is adopted and signed by auditors and Chief Executives of the bank. The report is addressed to the President of India.
All these forms of audits are related to the operational aspects of bank functioning. These are carried out to ensure that bank function properly and that specific guidelines issued for carrying out transactions are adhered to.

Concurrent Audit: –

In March 1992 a committee under the Chairmanship of Shri A.Ghosh the then
Dy. Governor was set up by Reserve Bank of India to enquire into the various aspects of frauds and malpractice’s in banks. As per the recommendations of the committee, Reserve Bank of India advised all Schedule Commercial Banks (Except Regional Rural Banks) in October 1993 to introduce the system of concurrent audit at large and exceptionally large branches, system of Concurrent Audit.

Objects of Concurrent Audit: -

Concurrent audit system is part of bank’s early warning system to ensure timely detection of irregularities and lapses. It is essentially a management process towards the establishment of sound internal functions and effective control to minimize the time lag between occurrence /incidence of serious errors or fraudulent manipulations and their timely detection.

It is a systematic examination of all financial transactions on a continuous basis for ensuring accuracy, authenticity and due compliance with internal system, procedures and guidelines of the bank as issued from time to time, and guidelines issued by Reserve Bank of India and other supervisory authorities on various parameters. It helps in detecting and preventing fraudulent transactions at branches. The object is that the branches take timely action for rectification of the irregularities /errors/discrepancy observed [B1] and ensure that these do not recur again.

Concurrent audit provides an additional administrative support to the branches, helps them in adherence to the prescribed systems and procedures and prevention and detection of lapses/irregularities at the branches. It shortens the interval between a transaction and its examination.
It is a tool in the hands of management for on the spot examination of the financial transactions at the branches by an independent agency and to know that the branches are performing within the delegated authority and that the delegated authority is exercised diligently. The person conducting this audit cannot become a part of the decision making process for any transaction/activity which is not accordance with the laid down procedure for conduct of the business.
It also encompasses physical verification of assets charged to the Bank including go down inspection at regular periodic intervals.
Concurrent Auditor to look into: -

1. Treasury functions bill rediscounting, dealing room activities, investment portfolio, foreign exchange business etc.
2. Branches whose total credit and other risk exposures aggregate to not less than 50% of the total credit and other risk exposure of the bank and branches whose aggregate deposit cover not less than 50% of aggregate deposits of the bank.
3. All special branches handling foreign exchange, dealing room operations, large problem branches and any other branch/department at the discretion of bank.
4. The major business covered by Concurrent Auditor is cash, investment, deposits, advances, foreign exchange, house keeping etc.
5. Since cent percent checking is not possible, Reserve Bank of India indicated the extent of the same ,i.e.,
· 100% checking in respect of off-balance sheet items, investments portfolio, foreign exchange transaction, fraud prone areas, advances of outstanding balance of Rs. 50 lac or more.
· 10-25%of checking of income/expenditure items, inter bank transactions, clearing transactions etc. and
· Intensive checking in areas requiring close monitoring and high value transactions.
Concurrent Auditor to report minor irregularities to Branch Manager on the spot for rectification; If these are rectified within a week, then, these are to be reported to controlling office. If serious irregularities are observed, these are to be reported to controlling office immediately.
Banks without delay should effectively follow up the points made by the Reserve Bank of India at the time of discussion of findings of inspection with the top management of banks and compliance report should be put up to the Board periodically.
Banks should examine the need for introducing a separate section of internal inspection machinery to scrutinise credit portfolio only. It will be necessary to staff this Section with competent and experienced personnel who will make an in-depth examination of the credit portfolio. It should be the responsibility of this Section to particularly scrutinise larger accounts and group exposures. To be effective, apart from competent officials to man the Section, the Section should be under the charge of a senior personnel reporting directly to the Chief Executive Officer of the bank. The summary of important findings should also be put up to the Audit Committee of the Board.

Management Audit: -

Management Audit is the complete health check of an organisation for ascertaining that all its systems, faculties are functioning properly. It is a systematic fact finding approach that examines the effectiveness of objectives, policies, standards, structure, procedures and control functions of an organisation. The objective of management audit is to point out weakness or irregularities at whichever level of management. It deals with Management Performance in qualitative terms. It probes into managerial practices and examines effectiveness of existing systems. The approach of this audit is constructive and futuristic. The purpose is to take corrective measures lest efficiency and effectiveness of organisation does not suffer and the organisation performs at optimum level with high standards of productivity.
Management audit is different from financial audit. While financial audit is based on historical data and examines the financial and accounting practices. Management audit probes into management practices, ensures compliance of statutory directives, regulations and identifies vulnerable areas of management functioning.
Management audit seeks to ascertain
· Whether managerial policies and actions are commensurate with resources available?
· Whether available resources are put to maximum advantage in terms of achieving the organisational goals?
· What kind of linkage /relationship exists between authority and responsibility of various functionaries?
· How efficiently the management has been able to anticipate changes that are taking place in the market?
· What is the level and quality of decisions taken by exercising authority vested and or delegated?
· What are the shortcomings of management processes and functioning?
It is the audit of overall quality of management. It is an independent and systematic appraisal of management functions, processes, policies, procedures, systems, objective, standards and utilization of available resources. It helps in measuring organisational effectiveness and also helps the organisation in chalking out strategies to foresee, manipulate and control environment. It is an ongoing surveillance system to ascertain whether sensory electrical nerves of the institution are judiciously functioning or not and that the person in command are judiciously making use of the power and authority. It is the analysis of the past and present on which depends the future. The object is to attain optimize efficiency and effectiveness in every field and also to aid /assist management in accomplishment of its goal. It helps in identifying weakness or irregularities at all levels of management.
As the name implies, Management Audit is concerned with the audit of all components of management processes like planning, organising, staffing, directing and controlling.
Difference between Management Audit and Inspection: -

1 Inspection:

It is the total audit system encompassing the entire gamut of management functions including the internal audit and inspection machinery
Management audit

It helps in ensuring compliance of directives, regulations, and procedures that is based on historical data
2_Inspection
It is an ongoing process and is concerned with all components of management processes like planning, organising, staffing, directing, controlling, leading, decision-making, motivating, delegating etc. All these functions are interwoven.
Management Audit
It basically evaluates accounting and procedures and covers microscopically, physical verification of transactions.

3Inspection
It evaluates functioning of those systems which are different from financial verification

Management audit

It is essentially an audit of the overall quality of management, in relation to the organisation’s objectives and policies

Computer Auditing:-

Information technology is playing an important role in the banking industry across the globe and banking industry in India is not an exception. Banks in India are rapidly switching over from manual operations to technologically embedded operations. This has resulted into overhauling of systems, procedures, processes, record keeping, and data management and control mechanism. Embracing technology has made banks vulnerable to intrusion and frauds. Computer crimes are on rise. Therefore computer auditing has become necessary.
Computer auditing is a branch of general auditing concerned with control of information and communications technologies (computers). Computer auditors work with technical controls built-in to the computer systems, also procedural controls (operations procedures etc.), legal controls (software licenses etc.),

A Computer auditor primarily studies computer systems and networks from the point of view of examining the effectiveness of their technical and procedural controls to minimize risks. Computer auditors often use data analysis tools to examine computer records.

Responsibility of a Computer auditor involves looking into

· Whether there are automated controls to check that all data input to the systems are within the bounds defined by the Bank? All data entered into a computer system are accurate, complete and authorized.
· That the application provides an adequate degree of control over the data being processed.
· Whether critical or sensitive data are subjected to the most stringent controls.
· That information stored by the computer is not accidentally (or deliberately) changed by some unauthorized process?
· This introduces the concept of control totaling and balancing, which is effectively the accounting concept of double-entry bookkeeping.
· Whether the process actually commits the organization to incur a liability (e.g., issues a payment), how do we know the liability is valid? How do we know it is properly approved?