RBI to intensify scrutiny of bank auditors after governance lapses

With governance concerns at IndusInd and Karnataka Bank, RBI is expected to tighten its engagement with statutory auditors and examine the role of board sub-committees more closely

The Reserve Bank of India (RBI) is expected to turn the knob on statutory auditors of banks, and by extension, on the role of their audit committees.

 

Senior sources in the bank auditing fraternity are of the view that with governance issues cropping up in two banks all at once, the RBI is to intensify its engagement with them. The reference here is to IndusInd Bank and Karnataka Bank, where the top two corner-room occupants in both banks stepped down in quick succession. This is also in line with Mint Road’s senior supervisory managers asking questions on bank board deliberations and the role of board sub-committees.

 

In April, IndusInd Bank's managing director (MD) and chief executive officer (CEO) Sumant Kathpalia, and Arun Khurana, its deputy CEO, quit. In Karnataka Bank, MD and CEO Srikrishnan Hari Hara Sarma resigned, effective July 15, 2025, with the bank's executive director, Sekhar Rao, set to move on at the end of this month. 

 

In IndusInd Bank, the auditors’ role is being looked into, with the National Financial Reporting Authority issuing notices to its current and former auditors and seeking information on the audit processes after the blow-out in the derivatives book. In the case of Karnataka Bank, it is the auditors' concerns over expenditures sanctioned by the two executives — Sarma and Rao — which made the duo quit.

 

Interestingly, the derivative loss of Rs 2,100 crore reported by IndusInd Bank on March 10 this year — in hindsight — has turned out to be an occurrence that RBI deputy governor M Rajeshwar Rao was prescient about.

 

In his speech on the Role of statutory auditors in emerging financial landscape (July 16, 2024), Rao referred to the revised guidelines on the classification and valuation of the investment portfolio in banks. The revised norms, effective from April 1, 2024, required banks to classify the investment portfolio based on the intention and objective of holding the financial asset (the business model) and the contractual cash flow characteristics of such assets. Further, the categorisation of an asset between banking book and trading book can have significant capital implications.

 

“These aspects shall require extensive use of management judgement. We expect the auditors to carefully understand the regulations and ensure that banks comply not only with regulations but also regulatory intent,” he said. He added that the interest of the regulator is not limited to fair and transparent representation of affairs in the entities regulated by it. “Banks and financial institutions are also users of financial statements and, to a large extent, their well-being is linked to the entities which they lend to or invest in. Therefore, we are equally concerned with sound audit practices that result in high-quality corporate reporting,” Rao noted.