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To deal with the issue of banks diverging from the prescribed asset classification norm and consequent under-provisioning, the Reserve Bank of India (RBI) has kickstarted the process of holding structured meetings with their statutory central auditors (SCAs) at the end of every quarter.
The move comes in the backdrop of the central bank flagging divergence in asset classification and loan-loss provisioning in respect of certain accounts as reported by banks, and its own assessment in the last couple of years.
Downward revision
Whenever the RBI’s assessment of non-performing assets (NPAs), which is based on risk-based supervision for the previous financial year, is higher than what a bank has reported, the latter has to revise the NPA figures and make additional provisions. This results in downward revision in profit numbers. So, by organising the quarterly meetings with SCAs, the RBI seems to be wanting to minimise such divergences.
“There was the question of interpretation of income recognition and asset classification norms. But now the RBI has structured meeting with the SCAs of all banks.
“So, before banks’ quarterly audit begins, the regulator briefs their SCAs as to which accounts they have to look at closely. This is now part of the supervisory programme,” said a senior banker. S Ravi, a practising Chartered Accountant, explained that the central bank wants a closer interaction with the auditors as it came across significant divergences in the views of statutory auditors, and RBI’s inspection pertaining to income recognition and NPA classification.
The banker quoted above said the regulator has told the auditors that if they find some deficiencies in both the conduct of an account as well as provisions, they have to take a closer look at it. If auditors are not satisfied, a bank has to downgrade the account and make provisions.
“The auditors have become very cautious. So, should a borrower miss a loan repayment for a day or two due to genuine reasons, they will brook no delay.
“The account will be downgraded and provisions will have to be made. There should be a serious re-think on this as it impacts banks,” elaborated the banker.
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