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ICAI steps in to check if bad loans are being misreported by banks

LiveMint logoLiveMint 28-05-2017 Gopika Gopakumar

Mumbai: The Institute of Chartered Accountants of India (ICAI) has written to the Reserve Bank of India (RBI), seeking information on the divergence in bad-loan estimates by some lenders and the central bank.

ICAI’s financial reporting review board (FRRB) will also review the 2015-16 financial statements of Axis Bank Ltd and Yes Bank Ltd, the accounting body said. Separately, an ICAI official said on condition of anonymity that ICICI Bank Ltd’s financial statement would also be reviewed.

ICAI’s disciplinary directorate wrote to RBI on 24 May seeking “specific information/details such as details of inspection by RBI with relevant documents to be made available to ICAI and further requesting them to file a formal complaint, if they so desire”, a spokesperson for the auditors’ body said in a written reply to Mint’s queries. 

Based on the central bank’s response, ICAI could consider “further course of action in terms of the disciplinary provisions prescribed under the Chartered Accountants Act, 1949”, the statement added.

RBI did not respond to the an email seeking comment.

ICAI’s inquiries come after three private sector banks reported a sharp divergence between their asset quality classifications and provisioning for 2015-16 and what the RBI deemed necessary.

On 18 April, the regulator told banks to make a disclosure in their financial statements if the divergence exceeded 15%. 

In its annual report for 2016-17, Yes Bank said its bad loan classification at the end of March 2016 varied from that of RBI to the tune of Rs4,176 crore. This was 558% more than the Rs748.9 crore of bad loans it had reported for that year.

Similarly, RBI’s classification of Axis Bank’s bad loans was 156%, or Rs9,478 crore, more than the bank’s disclosure in fiscal 2016. For ICICI Bank Ltd, this divergence was 19.5%, or Rs5,105 crore, more. 

All three banks have said that their latest audited statements (for fiscal 2017) fully reflect the impact of the divergence. 

ICICI Bank and Yes Bank did not respond to emails seeking comment. An Axis Bank spokesperson said it was not aware of any communication from ICAI. 

“Suffice to say, as a responsible institution, Axis Bank would respond to any query that we receive in the... matter,” said the spokesperson. 

ICAI has also directed its FRRB to engage with the banks’ auditors to understand the reasons behind the difference between the findings of the statutory audit and the RBI audit, a person with direct knowledge of the development said on condition of anonymity. 

Both Axis Bank and Yes Bank were audited by S.R. Batliboi and Co. Llp for the fiscal year 2016. For ICICI Bank, BSR and Co. Llp was the statutory auditor. 

“SR Batliboi & Co. LLP is not in receipt of any communication nor have been engaged on this matter with the Institute of Chartered Accountants of India (ICAI),” said a spokesperson for the company, a partner firm of Ernst & Young LLP. “Our audit of the financial statements of Yes Bank for the year ending 31 March 2016 and Axis Bank for each of the years ending 31 March 2016 and 2017 have been conducted in accordance with all the relevant norms, including the Standards on Auditing issued by the ICAI, as specified under Section 143(10) of the Companies Act, 2013; the extant RBI guidelines and relevant requirements of the Banking Regulation Act, 1949.”

KPMG, of which BSR & Co. is a partner firm, didn’t respond to an email seeking comment.

Experts said that it is not uncommon for RBI to point out divergences during its inspection audit, which typically happen after the statutory audit takes place and a bank releases its annual results. However, this is the first time that the regulator has asked lenders to make this public.

“The difference could arise due to the sample of accounts being considered. For instance the statutory auditors audit a sample of accounts given by the banks whereas RBI during its inspection audit takes a random sample,” said a former RBI official.

In other cases, even if a loan account is being serviced regularly (i.e. it is a standard asset) on the books of one bank, the same borrower might be defaulting elsewhere, prompting RBI to classify this as non-performing, said a chartered accountant who didn’t want to be named given the sensitivity of the matter. These are “qualitative divergences” where the regulator has applied its powers and discretion to classify loans, this person added.

“Firstly it’s not RBI’s job to go through all loan accounts and identify NPAs as they don’t have the skills. It’s the role of statutory auditors. If RBI has found large divergences during audit, then they should take supervisory action against bank management and auditors. Instead, RBI has only asked banks to make disclosures in the balance sheet. The problem is that most of the regulations are not rule based, but discretionary and therefore left to multiple interpretations. That’s the reason why NPA classification is not transparent in this country,” said K.C. Chakrabarty, a former deputy governor at the central bank.

“Typically, auditors make qualifications or observations if there is any discrepancy in interpretation of regulation. However in this case, none of the auditors have made any observations in the FY16 annual reports,” said another senior chartered accountant. “It’s therefore important to see why there was a difference in views of the auditor and RBI.”

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