Chartered accountants (CAs) who conduct the audit of Public Sector Banks (PSBs) are worried about the new laissez-faire attitude of the Reserve Bank of India (RBI).
The RBI has drastically reduced the percentage of business of bank branches that can be audited for the current financial year. Not only this, but from the next financial year, the RBI has left it to the PSBs to decide the percentage of the business they want to get audited.
CAs say this will severely impact their ability to properly assess the situation and highlight the risks.
RBI circular details
A recent circular from the RBI declared that the statutory branch audit of the PSBs should be carried out to cover only 70 per cent of the funded and non-funded business for 2022-2023 and that from 2023-2024 each bank can decide on its own the percentage of business be audited.
Earlier, the audit coverage of any PSB branch was 90 per cent, which would practically ensure the auditors got nearly the whole picture.
In combination with the rule, the RBI has also specified that the PSB board can decide on the selection of branches for audit purposes, which would effectively mean that 100 per cent of branches will not be covered under the audit.
PSBs have a total network of 84,000 branches in India, and the RBI has said that each auditor can cover only two branches.
“For FY23, statutory branch audit of PSBs shall be carried out so as to cover a minimum of 70 per cent of all funded and 70 per cent of all non-funded credit exposures of the bank. For FY24 and onwards, the PSBs are being given the discretion to determine business coverage under statutory branch audit, as per their board approved policy, after considering bank-specific aspects relating to business and financial risks,” said the RBI circular.
Expert’s take
Rajesh Sharma, the former Central Council member of the Institute of Chartered Accountants of India said, “We all are witness to what has happened in the past to many small banks in India. Take the recent incident of the Silicon Valley Bank in the US.”
Sharma added, “Banking crises emerge when their balance sheets don’t show a clear picture. Reducing the business coverage for audit purposes can be dangerous as the red flags can escape scrutiny. Earlier, the RBI took the rural branches of PSBs below ₹20 crore business off the audit list and is now reducing the scope of audit over the business. These are bad precedents, which will expose several banks to a risk.” .
Also, there could be some chaos among the PSBs and audit firms as the RBI has said that any audit entity which is preferred by multiple banks is allocated only to one bank on a first-come first-serve basis.
Hence, prior to the appointment or reappointment of auditors, each PSB has to upload the names of the entities they choose, on RBI’s audit allocation system.