 "Now, CAG wants to audit RBI")
In a rare public appearance, the Comptroller and Auditor General of India (CAG) Shashi Kant Sharma added a new dimension to the multiple discourses going on about the central bank and the banking system in the country.
Delivering the key note address at a conference on Financial and Corporate Frauds organised by industry body ASSOCHAM in New Delhi today, Sharma sprang a surprise saying that there was a need to consider CAG audit for financial regulators like the Reserve Bank of India (RBI). He also suggested that a good portion of the so-called bad loans could have found their way outside the country and might never be recovered.
Though the proposal had been floated in the past, the CAG’s observations assume significance coming at a time when the banking sector is reeling under severe stress caused by bad loans and the government is in the process of selecting a new governor for the central bank, whose policies have faced criticism from certain quarters.
Sharma, who completed three years as the national auditor in May, referred to the way advance markets such as the US and UK have dealt with the issue.
"The examples (of US & UK) cite the moves being made to bring forth more accountability and transparency on the financial sector regulators. In India, the CAG doesn’t audit the RBI, whose auditors are appointed by the central government under the provisions of the RBI Act. In the light of the growing incidents of financial frauds, this is a thought for consideration. Our audits should look into the risk and vulnerabilities facing our financial sector as well as the ability and effectiveness of regulators to mitigate such risks” he said.
The emerging international trend of the oversight of the regulators, in order to provide a higher level of assurance, is an interesting development that must be watched to inform our own system of oversight and assurance, 63-year old Sharma said.
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The industry reacted cautiously to the idea. Devamalya Dey, Group president - Audit & Management Governance, Yes Bank, said, "It is a thought provoking idea. It will be debated and discussed over a period of time, how we go about it."
The 12th CAG of the country explained how advance financial systems such as the USA and the UK are moving towards closer scrutiny of non-monetary policy functions of their central banks. “In the USA the GAO (Government Accountability Office) (counterpart of CAG in India) didn’t audit the Fed till 1978; post-78 it was allowed to review the Fed’s regulatory duties in the payment system, but was still prohibited from reviewing the deliberations, decisions and actions on monetary policy. But soon after 2009, the year of the financial crisis, the US congress allowed the GAO to audit loans made by the fed to individual companies,” the CAG said.
After 2012, it was further allowed to review Fed’s internal controls, policy on collateral, use of contractors and other activities, whilst still keeping the monetary policy outside its ambit. Presently he said, there was an ongoing debate of allowing the GAO to conduct a full scale audit of the Fed’s activities and regulatory structure.
In the UK, the Bank of England has historically been outside the ambit of the auditing institution, the NAO (National Audit Office). However recently, it has passed an Act in May 2016. According to this, the Bank of England must consult the Comptroller while appointing its auditors. This provides the Comptroller access to documents related to audit of bank. The Act also authorises the comptroller and auditor general to carry out examinations into the economy, efficiency and effectiveness with which the bank has used its resources in discharging its functions.
Speaking about the stressed assets issue, the CAG said that in recent times, a lot of attention has been given to frauds committed against banks, especially the public sector banks that are struggling with enormous amounts of non-performing assets or NPAs.
“There is a belief that a significant part of NPAs could be amounts fraudulently obtained as advances from the banking system. There is also a belief that a large part of these amounts may have been transferred abroad and may never get recovered”, said Sharma.
Sharma began his address with the recent incident of cyber crime in Bangladesh, which led to the resignation of its central bank governor Atiur Rahman. He spoke about the factors such as increasing technology use, faster communication and complexity of products aiding fraudsters.
“What should be the nature of oversight of the regulators who have such crucial role to play in protecting the financial sector and thereby the public sector from the ill effects of frauds?’’ he asked.
There should be a comprehensive strategy to deal with them in order to safeguard the integrity of the financial system as well as the enormous public interest, said Mr Sharma.
In a country that is largely financially illiterate, the possibility of fraud is much higher. According to Sharma, promoting financial literacy is a long term strategy for mitigating this risk. At the same time, the regulators have to work together to not only enhance their capacity to deal with financial frauds, but also to remove any regulatory arbitrage, Sharma said.