Audited bank books understate bad loans: RBI

Pointing to shortcomings in the quality of bank audits, the Reserve Bank of India (RBI) has said financial statements certified by accountants show lower non-performing assets than is actually the case.

There is a difference between the levels of non-performing assets (NPAs) found during the course of supervisions (by RBI) and those in audited books of banks. Bad loans in certified statements are less, RBI Governor, D Subbarao, said on Saturday.

Seeking an improvement on this front, Subbarao said, "We must identify where the systemic difference is coming from." He was addressing a conference organised by the Institute of Chartered Accountants of India (ICAI).

Subbarao said accountants who sign bank books were RBI's "eyes and ears". He added the regulator expected them to send out early warning signals to assist the regulator in the supervisory process. A true and fair picture must be shown to shareholders, he said.

The economic slowdown and rise in interest costs, owing to a rise of over 250 basis points in lending rates, have exerted pressure on the repayment capacity of retail and corporate borrowers. Gross NPAs of commercial banks rose to Rs 97,922 crore at end of March from Rs 84,698 crore a year ago, according to RBI data.

On the demand to reduce branch audit work, he said relevant branch audits at public sector banks (PSBs) had significantly declined due to core banking facilities and centralised record keeping.

The cost of audit of PSBs was significantly higher than the cost of auditing comparable private sector banks. However, ICAI has been resisted the move, as it would mean a reduction in work. ICAI's efforts in this regard are ill advised. Accountants should sharpen their skills in concurrent audits, rather than agitate for the retention of work which does not add value, Subbarao said.

The profession had shied away from the responsibility of prevention and early detection of fraud, Subbarao said. The need for such a service exists, and if the profession did not fulfil that need, other agencies which could provide such services would displace auditors and deprive them of a potentially expanding opportunity, he added.

The central bank governor also had a word of caution for accountants on monopoly in areas like signing financial statements, advising them against perpetuating their monopoly status. Accounting professionals were concerned about expanding career opportunities, owing to the institute's growing membership. The easy way out to expand opportunities would be to agitate for continuation of the monopoly position. However, this would be a mistake, Subbarao said, adding they should identify emerging opportunities and develop skills needed to exploit them.