RBI Notification

RBI revises LFAR norms for Banks to Improve Risk Management

The Reserve Bank of India (RBI) has revised the LFAR norms to assess the gaps and vulnerable risk management gaps. In the article, we will cover the areas that are to be brought to attention and b assessed as per revised LFAR norms.

RBI

RBI stands for Reserve Bank of India. It was established on 1^st April 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.

The functions of RBI are:

• It is the monetary authority of India.
• It regulates and supervises the financial system of the country.
• It acts as a manager of foreign exchange.
• It is the issuer of currency.
• It has a developmental role.
• It regulates and supervises the Payment and Settlement systems.

LFAR

LFAR norms stand for Long Form Audit Report. It is a detailed questionnaire prepared by the RBI (Reserve Bank of India). It was established in the year 1992-93. It is a Management letter addressed to the Banks management and not an annexure to the auditor’s report.

LFAR norms are used since 1992-93. It is revised from time to time, with the consultation of ICAI and a few banks’ that act as representative to suggest changes in regulatory/supervisory framework of banks.

Objective of LFAR

The objectives of LFAR norms are:

• It focuses not only on advances but also on operational areas in the branch;
• It covers operational risks extensively;
• It acts as a tool for early warning signals;
• It serves as checklist;
• It is a whistle blower for irregularities; and
• It is an excellent Audit planning tool.

However, RBI stated the overall objective of LFAR is to identify and assess the gaps and vulnerable areas in risk management, business operations compliance, and the usefulness of internal audit and provide independent opinion to the Bank’s board their observations.

The LFAR will cover areas like credit risk operational risk, market risk, capital adequacy, going concern, and liquidity risks assessment among others.

RBI revises LFAR norms

The LFAR norms are applied to the SCAs (Statutory Central Auditors) and the bank Auditors to keep check on the large scale changes in size, business model, and risk in the banking operations. RBI then has revised the LFAR norms^[1] and the format will be in operation from the period 2020-21 and onwards.

The revised LFAR norms ensure that the timely receipt of the LFAR from auditors. Also, the LFAR must be placed in front of the Audit Committee of the Board and the Local Advisory Board of the Bank for any rectification or correction.

Under the new LFAR norms, the banks will have to send a copy of the LFAR with the views or directions of the Board, to the RBI within 60 days of submission of the LFAR by the statutory auditors.

The LFAR norms with respect to various situations are:

LFAR norms: Identify gaps       

The overall objective of the LFAR norms is to assess and identify the gaps and vulnerable areas in risk management, business operations and the effectiveness of the internal audit and provide their opinions to the Board.

SCAs in addition to LFAR can give an opinion on KYC (know your customer)/ AML (anti- money laundering)/ cyber security issues, business performance, business strategy, etc

This may result in commenting on the various risks to which the banks are exposed to like credit, market and operational .

LFAR norms: Frauds/Vigilance

The SCAs should examine and comment on the appropriateness of the fraud risk management system. It also processes for the early detection, investigation of frauds, and adequacy of provisioning for reported frauds and deviations observed in compliance with directives issued by RBI.

The Reserve Bank wants the auditors to examine and specifically comment on the system of clearance of items debited or credited to suspense/sundry accounts with the focus on audit trail, along with the age-wise analysis of uncleared entries of suspense account, sundry deposit, etc. as on balance sheet date along with subsequent clearance thereof if any.

The RBI wants the Auditors to examine and comment on the system with the focus on audit tail, age-wise entry, etc. Any unusual entries observed must specifically be commented upon. It should also be examined that whether the bank has satisfied the auditor as per the RBI guidelines.

LFAR norms: Credit risk areas

It should broadly cover the adequacy and effectiveness of the loan policy along with the compliance to instructions issued by RBI in areas like exposure norms, interest rates, statutory and other restrictions, among others.

SCAs must declare whether the credit assessment policy is sufficient to capture the risk, as the adequacy of information/ data available with the bank.

The policy of delegation of power must be examined by the auditors, to check the adherence to laws applicable.

The central banks said that the entire process including structure of documentation in respect of joint/ consortium advances, renewal of documents, availability of relevant documents etc., must be examined.

Conclusion

The RBI has revised the LFAR norms wherein the SCAs (Statutory Central Auditors) can comment on the adverse features that are considered significant in the top 50 standard large advances and accounts that require managements’ action.

Read our article: Key Features of RBI Governor’s Statement, February 5, 2021