Knowledge of the Banking Industry:
The banking industry is the backbone of any economy as it is essential for sustainable socio-economic growth and financial statements in the economy.
There are different types of banking institutions prevailing in India which are as follows:
(a) Commercial Banks.
(b) Regional Rural Banks.
(c) Co-operative Banks.
(d) Development Banks (more commonly known as ‘Term-Lending Institutions’).
(e) Payment Banks.
(f) Small Finance Banks.
1.02 All these banks have their unique features and perform various functions / activities subject to complying with the RBI guidelines issued from
time to time. Section 6 of the Banking Regulation Act, 1949, lists down the forms of business in which banking companies may engage. The text of the Section 6 has been reproduced in Appendix I of the Guidance Note (given in CD accompanying the Guidance Note).
1.03 Of these banks, commercial banks are the most wide spread banking institutions in India. Commercial banks provide a number of products and
services to general public and other segments of economy. Two of the main functions of commercial banks are (1) accepting deposits and (2) granting
advances. In addition to their main banking activities, commercial banks also undertake certain eligible Para Banking activities which are governed by the RBI guidelines on Para Banking activities.
1.04 The functioning of banking industry in India is regulated by the Reserve Bank of India (RBI) which acts as the Central Bank of our country. RBI is
responsible for development and supervision of the constituents of the Indian financial system (which comprises banks and non-banking financial institutions) as well as for determining, in conjunction with the Central Government, monetary and credit policies keeping in with the need of the hour. Important functions of RBI are issuance of currency; regulation of currency issue; acting as banker to the central and state governments; and acting as banker to commercial and other types of banks including term-lending institutions. Besides, RBI has also been entrusted with the responsibility of regulating the activities of commercial and other banks. No bank can commence the business of banking or open new branches without obtaining licence from RBI. The RBI also has the power to inspect any bank.
1.05 The provisions regarding the financial statements of banks are governed by the Banking Regulation Act, 1949. The Third schedule to the
aforesaid Act, prescribes the forms of balance sheet and profit and loss account in case of banks. Readers may refer Appendix II of the Guidance Note (given in CD accompanying the Guidance Note) for text of third schedule to the Banking Regulation Act, 1949. Further, in case of banking companies, the requirements of the Companies Act, 2013, relating to the balance sheet, profit and loss account and cash flow statement of a company, in so far as they are not inconsistent with the Banking Regulation Act, 1949, also apply to the financial statements, as the case may be, of a banking company. It may be noted that this provision does not apply to nationalised banks, State Bank of India, its subsidiaries and regional rural banks.
1.06 The provisions regarding audit of Nationalised Banks are governed by the Banking Regulation Act, 1949 and the RBI Guidelines. The provisions regarding audit of Banking Companies are governed by the Banking Regulation Act, 1949, RBI Guidelines and the provisions of the Companies Act, 2013. The illustrative formats of auditor’s report are given in Appendices III to VI of the Guidance Note (given in CD accompanying the Guidance Note) as follows:
Appendix III – Illustrative Format of Report of the Auditor of a Nationalised Bank
Appendix IV – Illustrative Format of Report of the Auditor on the Standalone Financial Statements of a Banking Company
Appendix V – Illustrative Format of Report of the Branch Auditor of a Nationalised Bank
Appendix VI – Illustrative Format of Report of the Branch Auditor of a Banking Company
1.07 The auditors (both central statutory auditors and branch auditors) should also ensure that their audit report complies with the requirements of SA 700, “Forming an Opinion and Reporting on Financial Statements”, SA 705, “Modifications to the Opinion in the Independent Auditor’s Report” and SA 706,
“Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”.
1.08 Besides the main audit report, the terms of appointment of auditors of public sector banks, private sector banks and foreign banks (as well as their branches), require the auditors to also furnish a long form audit report (LFAR).
The matters to be dealt with by auditors in LFAR have been specified by the RBI.
1.09 For the reference and benefit of the members, Appendices VII to XI of the Guidance Note provide the illustrative formats of Engagement Letter in case of a Nationalised Bank, Engagement Letter to be sent to the Appointing Authority of the Nationalised Bank by Branch Auditor, Engagement Letter to be sent to the Appointing Authority of the Banking Company, Engagement Letter to be sent to the Appointing Authority of the Banking Company (Separate only for Internal Financial Control u/s 143(3)(i) of Companies Act, 2013) and Written Representation Letter to be obtained from Branch Management.
This year, the Guidance Note also contains a separate Appendix XII on “Demonetisation”.
