ICAI writes to RBI asking about loan divergence
TOUGH ACT ICAI mulls action against auditors based on central bank’s response
The Institute of Chartered Accountants of India (ICAI) has written to the Reserve Bank of India seeking information on the divergence in loan classification by certain lenders that the central bank later identified as non-performing.
ICAI’s financial reporting review board will also review the 2015-16 financial statements of Axis Bank and Yes Bank.
The ICAI’s disciplinary directorate wrote to RBI on May 24 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 auditor body said in a written reply to 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.
ICAI’s inquiries come after three private sector banks reported a sharp divergence in their asset quality classification and provisioning for financial year 2015-16 from what RBI identified as necessary. On April 18, the regulator told banks to make such a disclosure in their financial statements if the divergence exceeded 15%.
In its annual report for fiscal 2017, Yes Bank reported that its bad loan classification at the end of March 2016 varied from that of RBI to the tune of ₹4,176 crore. This was 558% more than the ₹748.9 crore bad loans it had reported for that year. Similarly, RBI’s classification of Axis Bank’s bad loans was 156%, or ₹9,478 crore, more than the bank’s disclosure in fiscal 2016. For ICICI, this divergence was 19.5% or ₹5,105 crore more.
All three banks have said that their latest audited statements (for fiscal 2017) fully reflect the impact of these divergences.
While State Bank of India said that the divergence in its asset classification with RBI was less than 15%, many other state-run banks are yet to release their annual reports which will contain this disclosure.
ICICI bank and Yes Bank did not respond to emails seeking comment. An Axis Bank spokesperson said that they were 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 pertained matter,” said the spokesperson.
The regulator for chartered accounts has also directed its financial reporting review board (FRRB) to engage with the banks’ auditors to understand the reason behind the difference between the statutory audit and RBI audit, said a person with direct knowledge.
Both Axis Bank and Yes Bank were audited by S. R. Batliboi & Co. LLP for fiscal year 2016. For ICICI Bank, B S R & 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 March 31, 2016 and Axis Bank for each of the years ending March 31, 2016 and 2017, have been conducted in accord- ance 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 (whose partner firm is BSR & Co.) didn’t respond to an email seeking comment.
Experts said 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 the regulator has asked lenders to make it 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) in 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. These are “qualitative divergences” where the regulator has applied its powers and discretion to classify loans, this person added.
“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,” said another chartered accountant.