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LFAR AND SPECIAL

PURPOSE CERTIFICATES

H. ANIL KUMAR

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Introduction

The approach to issuing the LFAR and other special purpose certificates

Understand the relevance of questions in the LFAR to the main audit report

Matters to be considered for issuing special purpose certificates

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Agenda

LFAR

– Some issues

– Itemwise relevance of LFAR question to main

audit report

Special Purpose Certificates

– General considerations

– Certain specific certificates

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Overview- LFAR

Issued 1985

Latest version is of 2003

LFAR of bank is addressed to the MD

Akin to letter of weakness

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Approach to answering LFAR

Answers to be specific

Discuss contents with the branch head

Objective to ensure correct presentation of facts which have been verified during the course of the audit

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Main Report and LFAR

Main Report should not refer to LFAR

LFAR may elaborate matters in Main Report

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LFAR- Auditor’s Responsibilities

Give detailed information/statement

Give an opinion

Give reply based on cases examined on test check basis

Study system in operation so as to give the reply

Give suggestions

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Internal Instructions - Relevance

Reply sought specifically in conjunction with relevant bank instructions (“ Instructions of Controlling Authority” )

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Some issues

Do we carry out the audit to answer the LFAR?

Which Report should be completed first - LFAR or Main Audit Report?

How should one collect the information for the LFAR?

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Some Issues

Disclaimers in LFAR with respect to any significant problem faced in its preparation?

– Impact on Main Audit report

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Large Advance

How do we “examine all large advances”

Whether Annexure to LFAR needs to be audited

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QUESTIONS?

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SPECIAL PURPOSE

CERTIFCATES

Types of Certificates

Issues

Some Specific Certificates

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Types of Certificates

Claims for reimbursement/ subsidy

Compliance Certificates

– With monetary implications

– Without immediate or apparent monetary

implications

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ISSUES

Implications of “True and Correct”

Certificate Format

Additional Procedures required to issue these certificates

Use of test check?

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Specific Certificates

Interest subvention- export credit

Interest subvention – crop loan

PMRY

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Interest Subvention- Export Credit

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Eligible Sectors

(i) Textiles (including Handloom)

(ii) Handicrafts

(iii) Carpets

(iv) Leather

(v) Gems and Jewellery

(vi) Marine Products, and

(vii) Small & Medium Enterprises (as defined in the Annex)

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Small & Medium enterprises

Enterprises engaged in the manufacture or production, processing or preservation of goods

Investment limits:

– Micro enterprise: upto Rs. 25 lakh

– Small enterprise: exceeds Rs. 25 lakh below Rs. 5 Crore

– Medium enterprise Above Rs. 5 Crore below Rs. 10 Crore

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Conditions

– Interest rate on pre-shipment credit up to 270 days and post-shipment credit up to 180 days on the outstanding amount for the period not exceeding BPLR minus 4.5percentage points

– the interest rate, after subvention will not fall below 7 per cent.

– the benefit of the 2 per cent interest subvention is passed on completely to the eligible exporters.

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Procedure for reimbursement

Subvention would be reimbursed on the basis of claim submitted in the format enclosed to the circular

Amount of subvention will be calculated on the amount of export credit from the date of disbursement up to the date of repayment or up to the date beyond which the outstanding export credit becomes overdue i.e. for preshipment credit up to 270 days and post-shipment credit up to 180 days, whichever is earlier.

iii) The claims should be accompanied by an Auditor's Certificate certifying that the claims for subvention of Rs…………….for the period……, as true and correct. Settlement of the claim will be done only on receipt of this certificate.

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Interest Subvention on crop loans

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The Scheme

2% interest subvention to be provided on Short Term Production Credit (Crop Loans) upto Rs. 3 lakh per farmer

Calculated on the crop loan amount from the date of its disbursement/drawal up to the date of repayment or up to the date beyond which the outstanding loan becomes overdue i.e. March 31, 2010 for Kharif and June 30, 2010 for Rabi, respectively, whichever is earlier, subject to a maximum period of one year.

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Conditions

Bank should make available credit at 7%

Claim should be accompanied by auditors’ certificate that the claim is true and correct

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Additional 1 % Subvention

In respect of those prompt paying farmers who repay their short-term production credit within one year of disbursement of such loans.

This subvention will be available to such farmers on the short-term production credit availed by them during the year for a maximum amount of Rs.3 lakh and the amount of subvention will be calculated from the date of disbursement/drawal up to the date of repayment subject to a maximum period of up to one year per farmer account.

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Condition

The effective interest rate charged to the prompt paying farmers is 6% p.a. up to Rs. 3 lakh.

Banks to credit the additional 1% subvention to the farmers account only after their prompt repayment

and (then only ) seek reimbursement subsequently.

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Subsidy under PMRY Scheme

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Check Points

Whether borrower is eligible under the scheme

– Age

– Income

– Residence

– Not defaulter

Activity is eligible activity

( May be able to rely on certificate of the Implementing Agency)

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Check Points- other eligibility

criterion

Total project cost

Amount of loan

Contribution of Margin

Sanction

Documentation

Disbursement

Subsidy Management

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Conclusion

Test check may not be possible

ICAI must take up with RBI that the certification involves additional responsibilities and must be reckoned as a separate assignment

Special certificates for small branches can time than the audit.

– Suggest timing other than for annual audit

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QUESTIONS?

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THANK YOU