In a first-of-its-kind move, the Reserve Bank of India (RBI) is set to hold formal meetings with banks' auditors on a quarterly basis from April 1, making sharper the regulatory spotlight on them. Now, these auditors won’t be able to claim they only get to have a post-facto and static view on banks’ financials.
A classified communique from the RBI’s Department of Banking Supervision’s audit cell — marked to banks’ chief executives, compliance departments, and auditors — said the quarterly interaction would cover areas pertaining to income recognition, asset classification, systems to track borrowers, dud loans, governance and exceptions, suspicious transactions, technology, cyber security, and frauds. The banking regulator will also seek the details of specific accounts from auditors. The meeting will be chaired by the RBI’s senior supervisory authority in charge of individual banks. Officials of the banks concerned will not be present, though.
Currently, Mint Road holds an annual meeting with auditors — and as and when required — but there is no structured format for such interactions through the year.
The new format will help the central bank get a real-time sense from auditors on what’s going on in banks. It will also aid the RBI’s central office to give a heads up to its on-site inspectors, and spruce up the inspection mechanism, including risk-based supervision — the off-site surveillance system.
It will be a departure from the current practice of engaging with auditors once they have signed off on the annual accounts of banks and the long-form audit report. The central bank has basically given a new life to the largely discontinued practice of quarterly discussions with banks – it is now to be with auditors.
The trigger for the new format is the huge variance seen in bank-declared non-performing assets (NPAs) and what’s subsequently been thrown up in the RBI’s inspection reports, besides less-than-adequate compliance and governance standards in banks. These issues had come to the fore when the central bank undertook its asset quality review (AQR), and are to be addressed now within the matrix of a formal interactive structure between banks’ auditors and the RBI.
The fount of the current narrative started when auditors were caught flat-footed after the AQR was initiated in December 2015, and the central bank’s April 18, 2017 circular on disclosures on provisioning. The latter asked banks to disclose in the “Notes to Accounts” of their financial statements the additional provisioning requirements exceeding 15 per cent of the published net profits for the reference period; or the additional gross NPAs (identified by the RBI) exceeding 15 per cent of the published incremental gross NPAs for the reference period -- or both. When the RBI made its displeasure clear to auditors on the variance in dud loans, they apprised the regulator of the fact that from the time the AQR was announced and the circular on divergence in provisioning was issued, two rounds of bank inspections had been undertaken by Mint Road. While cognisance had been taken of the AQR when they audited banks at end-March 2016, the exercise had been interpreted as being “subjective” to the extent the RBI decided which accounts were to be classified as NPAs.
Auditors had gone by Mint Road’s general guidelines on income recognition and asset classification even as they took AQR’s observations on board. “It was all lost in the English of the communication”, said a senior partner at an audit firm who did not wish to be named, adding: “In any case, our point was we are not inspectors but auditors, and don’t get to forensically know if there was systemic fund diversion or round-tripping by borrowers.”