Page 200 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes 10.8 Audit of Investment and Securitization Transactions

Funds management department of the bank is one of the most sensitive and dynamic areas of a
bank’s operations. At any point of time it accounts for about 40% of the total financial resources
and more than 55-60% of a bank’s income. Rules and regulations are generally laid down
governing the functioning of the activity by virtue of an investment policy document duly
approved by the Board, which is required to be in conformity with regulatory guidelines issued
by Reserve Bank of India from time to time. The investments are categorized into SLR and
non- SLR exposures.
The SLR investments are required to be maintained on daily basis in Liquid assets and required
to be reported to Reserve Bank of India on a fortnightly basis. Failure to maintain the required
statutory minimum would not only entail in payment of penalty and interest for the shortfall
but also the regulatory actions in the form of increased supervisory interventions and ultimate
cancellation of banking licence. The investments that qualify for SLR are, Central Government
and other approved Securities, Bonds Guaranteed by Central/State Governments, Excess CRR
balances, Current balances with SBI and nationalized banks, Cash in hand. All other investments
constitute non-SLR investments.
The Reserve Bank of India has issued detailed guidelines on classification, valuation and
operations of investment portfolio by banks. Specific guidelines are given in regard to Ready
Forward (buy back) deals, Transactions through Subsidiary General Ledger A/c, Use of Bank
Receipts, and Retailing of Government securities, Internal Control System, Dealings through
Brokers, Audit, Review and reporting. Detailed guidelines have also been issued by Reserve
Bank of India in regard to exposure in non-SLR investments.

The investment portfolios of banks (both SLR & non-SLR) are closely monitored by the Reserve
Bank through the Offsite Monitoring of Returns (OSMOS) submitted by banks. Banks are required
to classify all their investment exposures into three categories viz. ‘Held to Maturity’, ‘Available
for Sale’ and ‘Held for Trading’.

Did u know? Securitization is a process by which the future cash inflows of an entity
(originator) are converted and sold as debt instruments called pay through or pass through
certificates with a fixed rate of return to the holders of the debt instrument in the form of
beneficial interest. The originator of a typical securitization, transfers a portfolio of
homogenous financial assets to a Special Purpose Vehicle (SPV), normally a trust. The SPV
is basically funded by investors.

In return for the transfer, the originator gets cash up-front on the basis of a mutually agreed
valuation of the receivables. The transfer value of the receivables is done in such a manner so as
to give the lenders a reasonable rate of return. In ‘pass-through’ and ‘pay-through’ securitizations,
receivables are transferred to the SPV at the inception of the securitization, and no further
transfers are made. All cash collections are paid to the holders of beneficial interests in the SPV
(basically the lenders).

Objective

The objective of investments are statutory requirements and to deploy surplus liquidity and
floats for generating optimum returns. The objectives of securitization transactions are several,
which inter alia include higher credit rating and cheaper borrowings. They can be done by
conversion of existing or future cash in-flows of any entity i.e. loans, trade receivables, credit
card receivables, rent etc. into tradable security. Securitization can, at times, be used for better

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