Audit of banks...who is responsible?
The governor of the Reserve bank of India appeared before the Parliamentary Standing committee on finance told that the RBI needs more powers to control the public sector banks whose NPA's are increasing significantly. He said that it is impossible for the RBI to audit each and every branch in terms of Audit. But who is responsible for Auditing the banks?
The Government is the owner of the Public sector banks(PSB's). This also means that the government appoints the members to the boards of these banks. In the past we have seen less than qualified people being appointed to the helm of affairs at a particular bank. Thus it is difficult for the regulator such as the RBI to do the audit of thousands of branches.
The RBI is a regulator who issues guidelines to the auditors to audit. But does the RBI have powers to audit the banks? Yes. Under the Banking Regulation act, RBI has wide ranging powers. But the problem here is dual control. The cooperative banks in India are under the control of both state governments and the RBI, thus they follow the guidelines of whichever regulator they feel comfortable in different areas of supervision. This gives rise to ambiguity, loose control and corruption.
The role of the RBI and the role of the Government needs to be specified correctly. The governor said he is not in favour of the RBI nominees being working as the directors of the board. Also he said that PSB's are not exactly banking companies but corporations and hence they do not come under the Banking Regulations act of 1949, while the private banks do come as they are banking companies. This loop needs to be closed and thus the RBI needs more powers to control the PSB's vis-a-vis the private sector banks.
The governor asked for 3 tiers of risk assessment. First, the person who sanctioned the loan, the second tier is where the managerial action is and third is the auditing action. As of today 3 types of audit happens in India - Internal audit, concurrent audit and extra statutory audit. These audits happen on a branch by branch basis. However the quality of auditors is overseen by the banks board. When the board members are polititians or less experienced people(as appointed by the Government) they tend to appoint dubious people to key auditing positions. This mechanism of maintaining the quality and integrity of the auditors has to be strengthened in India.
The RBI is also having too many powers in too many domains. And it is reluctant to share its powers with other entities. The Financial sector legislative reforms commission(FSLRC) has said that the markets in India especially the corporate bond market should be only handled by SEBI; but RBI has fought tooth and nail against reducing of that power sharing.
A banking system runs on trust. In the case of PSB's the trust is very much taken for granted, as it is thought that Government will take care of the PSB's come whatever may. The Private banks focus on the retail loans while the PSB's play an important role in the term lending especially in the infrastructure area. This is which they were not properly equipped to handle. The effectiveness and transparency of audit and the adequacy of the risk assessment mechanism needs to be strengthened enormously. The RBI should focus on the core area of risk assessment mechanisms by strengthening the audit standards. This can be addressed by keeping the PSB's at arms length or even abolishing the Dept of Financial services via a holding company or the likes of it.
It is the dept of Fin services which has the powers of the RBI with respect to the PSB's. It is this power that the governor is asking to make sure there is no duplication of efforts and also the government is lightened on the banks regulation on a day to day basis. This powers can be even better exercised if a holding company or a Bank board bureau is established which is always in touch with the RBI on regulation of banks.
Thus the banking sector can be strengthened only with the government establishing of Banks Board Bureau, RBI setting up transparent audit laws and better co-ordination between the Government and the RBI.
The Government is the owner of the Public sector banks(PSB's). This also means that the government appoints the members to the boards of these banks. In the past we have seen less than qualified people being appointed to the helm of affairs at a particular bank. Thus it is difficult for the regulator such as the RBI to do the audit of thousands of branches.
The RBI is a regulator who issues guidelines to the auditors to audit. But does the RBI have powers to audit the banks? Yes. Under the Banking Regulation act, RBI has wide ranging powers. But the problem here is dual control. The cooperative banks in India are under the control of both state governments and the RBI, thus they follow the guidelines of whichever regulator they feel comfortable in different areas of supervision. This gives rise to ambiguity, loose control and corruption.
The role of the RBI and the role of the Government needs to be specified correctly. The governor said he is not in favour of the RBI nominees being working as the directors of the board. Also he said that PSB's are not exactly banking companies but corporations and hence they do not come under the Banking Regulations act of 1949, while the private banks do come as they are banking companies. This loop needs to be closed and thus the RBI needs more powers to control the PSB's vis-a-vis the private sector banks.
The governor asked for 3 tiers of risk assessment. First, the person who sanctioned the loan, the second tier is where the managerial action is and third is the auditing action. As of today 3 types of audit happens in India - Internal audit, concurrent audit and extra statutory audit. These audits happen on a branch by branch basis. However the quality of auditors is overseen by the banks board. When the board members are polititians or less experienced people(as appointed by the Government) they tend to appoint dubious people to key auditing positions. This mechanism of maintaining the quality and integrity of the auditors has to be strengthened in India.
The RBI is also having too many powers in too many domains. And it is reluctant to share its powers with other entities. The Financial sector legislative reforms commission(FSLRC) has said that the markets in India especially the corporate bond market should be only handled by SEBI; but RBI has fought tooth and nail against reducing of that power sharing.
A banking system runs on trust. In the case of PSB's the trust is very much taken for granted, as it is thought that Government will take care of the PSB's come whatever may. The Private banks focus on the retail loans while the PSB's play an important role in the term lending especially in the infrastructure area. This is which they were not properly equipped to handle. The effectiveness and transparency of audit and the adequacy of the risk assessment mechanism needs to be strengthened enormously. The RBI should focus on the core area of risk assessment mechanisms by strengthening the audit standards. This can be addressed by keeping the PSB's at arms length or even abolishing the Dept of Financial services via a holding company or the likes of it.
It is the dept of Fin services which has the powers of the RBI with respect to the PSB's. It is this power that the governor is asking to make sure there is no duplication of efforts and also the government is lightened on the banks regulation on a day to day basis. This powers can be even better exercised if a holding company or a Bank board bureau is established which is always in touch with the RBI on regulation of banks.
Thus the banking sector can be strengthened only with the government establishing of Banks Board Bureau, RBI setting up transparent audit laws and better co-ordination between the Government and the RBI.
Comments
Post a Comment