The auditor is expected to comment on the following aspects of the system for ensuring compliance with the SLR/CRR requirements:
System of compiling weekly DTL position from branches.
Records maintained for the above purpose
Section 24 of the Banking Regulation Act, 1949, requires that every scheduled commercial bank shall maintain, in India, in cash, gold or unencumbered approved securities, an amount, the value of which shall not, at the close of business on any day, be less than 20.75 per cent from October 1, 2016 and 20.50 per cent from January 7, 2017, on the total net demand and time liabilities (NDTL) as on the last Friday of the second preceding fortnight valued in accordance with the method of valuation specified by the Reserve Bank of India from time to time.. This is referred to as ‘statutory liquidity ratio’ (SLR). Section 18 of the Act requires that every banking company, not being a scheduled bank, shall maintain in India by way of cash reserve with itself, or by way of balance in a current account with the RBI, or by way of net balance in current accounts, or in one or more of the aforesaid ways, a sum equivalent to at least 4.00 per cent of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight. Every scheduled bank is similarly required, by virtue of the provisions of section 42(1) of the Reserve Bank of India Act, 1934, to maintain with the RBI an average daily balance the amount of which shall not be less than 4.00 per cent of the total of its demand and time liabilities in India. The said rate may, however, be increased by the RBI by notification up to 20% of the total of demand and time liabilities in India. Consequent upon the amendment to sub-section (1) of Section 42 of the RBI Act, 1934, effective from June 22, 2006, the RBI having regard to the needs of securing monetary stability in the country, can prescribe the Cash Reserve Ratio (CRR) for Scheduled Commercial Banks without any floor rate or ceiling rate. The RBI, from time to time, reviews the evolving liquidity situation and accordingly decides the rate of CRR required to be maintained by Scheduled Commercial Banks. In terms of RBI circular dated November 26, 2016 on Requirement for maintaining additional CRR, Banks, effective from the fortnight beginning November 26, 2016, are required to maintain with an incremental CRR of 100 per cent on the increase in NDTL between September 16, 2016 and November 11, 2016.
These requirements seek to ensure that banking institutions maintain adequate liquid assets in an unencumbered form so as to safeguard the interests of depositors.
To comply with these requirements, banks have evolved systems whereby all branches send their weekly trial balance as on every Friday and these are consolidated at the head office. Based on this consolidation, the total demand and time liabilities (DTL) is determined for every alternate Friday (normally called ‘the reporting Friday’). Banks have to maintain cash or other eligible assets on the basis of the DTL position during the following fortnight.
The auditor should examine the system for compilation of DTL position, including verification of returns and their consolidation by the bank. The auditor should request the Management to provide him a compilation of all the circulars / instructions of the RBI regarding composition of items of DTL. He should review their compliance by the bank. Any weaknesses in the system of compilation of DTL and its reporting to the RBI in the prescribed form should be reported by the auditor, along with the suggestions, if any, to overcome such weaknesses.
The auditor may examine compliance with SLR/CRR requirements with reference to the eligible assets maintained by the bank.
It may be noted that the RBI, vide its Master Circular No. RBI/2015- 16/98 DBR. No. Ret. BC.24/12.01.001/2015-16 dated July 1, 2015 on “Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)” requires that the statutory auditors should verify and certify that all items of outside liabilities, as per the bank’s books had been duly compiled by the bank and correctly reflected under DTL/NDTL in the fortnightly/monthly statutory returns submitted to RBI for the financial year.