Chartered accounts (CAs) who audit public sector banks (PSBs) are worried as the Reserve Bank of India has left it to the banks to decide the percentage of their branch business they want to get audited from FY24. Auditors say this would severely impact their ability to properly assess the situation and highlight the risks.
For the current financial year, the RBI has drastically reduced the percentage of business of the branches that can be audited.
RBI circular details
A recent circular from the RBI declared that the statutory branch audit of the PSBs should be carried out to cover a minimum of 70 percent of the funded and non-funded business for FY23 and from FY24 they can decide the percentage of business coverage they want audited. Earlier, the audit coverage of any PSB branch was 90 percent.
The RBI has also specified that the PSB board can decide on selection of branches for audit purposes, which would effectively mean that all branches will not be covered under the audit. There are a total of 84,000 bank branches in India and RBI has said that each auditor can cover only 2 branches.
“For FY23, statutory branch audit of PSBs shall be carried out so as to cover a minimum of 70 percent of all funded and 70 percent of all non-funded credit exposures of the bank. For FY23-24 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,” the RBI circular 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. All banking crises have emerged 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 business. These are bad precedents, which will expose several banks to risk,” said Rajesh Sharma, the former Central Council member of Institute of Chartered Accountants of India.
Also, there could be some chaos among the PSBs and audit firms as RBI has said that any audit entity which is preferred by multiple banks is allocated only to one bank on a first come first served basis. Hence, prior to appointment or reappointment of audit entities, each PSB has to upload the names of the entities they choose, on RBI’s audit allocation system.