RBI’s audit diktat difficult to implement

Economy


As India has only a handful of quality audit firms, it might be difficult to operationalize central bank directions on systemic oversight at high-street lenders. Mint Road has capped audit tenures at banks and NBFCs, sought joint audits, and limited the number of firms an auditor can oversee.

Industry bodies are now planning to petition the regulator to ease the norms and delay their implementation at least to next year.

In a notification released on Tuesday, RBI said that banks and NBFCs cannot continue with the same auditor beyond three years down from four years earlier and lower than the five years permitted by the companies act. Moreover, an audit firm has to compulsorily have a cooling off period of six after auditing a bank for one tenure, which means banks will have to hunt for a new auditor every three years.

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Audit firms can also audit not more than eight NBFCs and banks have been asked to hire joint auditors which will increase the cost of compliance for banks. Moreover, these changes have been made effective in the current fiscal not giving banks and NBFCs enough time to prepare.

“Through these changes the RBI has put the burden of compliance, audit and risk on banks. They have to comply and run more and more checks and the RBI will just wet the numbers. One understands the regulator’s view of tightening these regulations but they don’t seem feasible at all,” said a banker.

Bankers point out that many auditors would have completed three years this fiscal and hence would not be eligible to be reappointed next year.

The process itself for the appointment will be expensive and time consuming. “The process of appointment of new auditors includes identification / evaluation of 3-4 audit firms by the audit committee, approval of the shortlisted firm by the board and thereafter the shareholders. It will be particularly rigorous for NBFCs some of whom are small and are already preparing for an AGM in the midst of a Covid crisis,” said a banker.

Larger the balance sheet more number of auditors have been allowed. For example, for balance sheets of up to Rs 5 lakh crore while more than Rs 20 lakh crore balance sheet banks can appoint up to 12 auditors.

“The RBI’s idea is that more auditors will audit different functions like one can do assets, another treasury and another liabilities. It may bring focus but will this quantity bring quality is the question. Multiple auditors can create all soughts of confusion. In the US, even JP Morgan with $4 trillion of assets has one auditor while in India

has 150,” said a consultant.

RBI has also restricted audit firms to audit only eight NBFCs.

“There are thousands of NBFCs. If the RBI thinks that restricting auditors will help then all the best to them because there are not as many audit firms in the country,” said another consultant.

In case of entities borrowing from abroad, foreign lenders require auditors to be one amongst the big 4 audit firms with prior approval of the lenders.

Moreover, all commercial banks with assets over Rs 1000 crore are to ensure the audit partners association to be exclusive.



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