RBI for greater role of CAs in ensuring solvency of banks

 

RBI deputy governor KC Chakrabarty said that the review of banks by auditors transcend the ordinary to enable them to critically analyse the operations of banks they audit and recommend improvements to the internal control framework

Mumbai: Seeking to enhance role of auditors in ensuring solvency of banks, the Reserve Bank of India (RBI) wants chartered accountants to ask pointed questions concerning risk assessment and capital adequacy of lenders, reports PTI.

“Auditors will need to move beyond narrow transactions audit consideration to look at the larger picture. They will need to ask pointed and relevant questions (from banks)”, RBI deputy governor KC Chakrabarty said while addressing a conference of ICAI on banking sector audit in Chennai recently.

In view of the problems being faced by the banking sector the world over, he said, “it is important ...that the auditors ask probing questions about the adequacy of banks' provisions and capital...there remains scope for more rigorous attention to the issues of adequacy of capital and provisions by auditors”.

The annual financial inspection of banks by the RBI reveals auditing ‘gaps’ which are needed to be bridged, he said. “The auditors need to concentrate on the audit of head office of banks as against audit of branches given the emergence of core banking, centralised record keeping and even centralised risk management”.

Mr Chakrabarty said the auditors should ask questions like “Do decisions in the bank take adequate cognisance of risk considerations? Do banks adequately understand the risk reward characteristics of product/market/business they are entering into?” 

The review of banks by auditors, he said, should transcend the ordinary to enable them to critically analyse the operations of banks they audit and recommend improvements to the internal control framework.

 

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Breach of fiscal deficit target will have implications: RBI

 

RBI deputy governor HR Khan said while shrinking value of money on account of high price rise called for a tight monetary policy, there is also a need to maintain a balance between controlling inflation and boosting growth

Mumbai: The fiscal deficit target of 4.6% of the gross domestic product (GDP) in 2011-12 could be missed and this will have serious implications on inflation, reports PTI quoting the Reserve Bank of India (RBI).

“In 2011-12, developments so far indicate that the fiscal deficit target of 4.6% of GDP could be breached which will have implications for domestic inflation.

“The moderation in private demand resulting from anti-inflationary monetary policy stance of the RBI will be partly offset by the expansion in public sector demand in terms of the size of the fiscal deficit,” RBI deputy governor HR Khan said.

Speaking at the 10th National Management Seminar in Bhubaneswar recently, Mr Khan said while shrinking value of money on account of high price rise called for a tight monetary policy, there is also a need to maintain a balance between controlling inflation and boosting growth.

The government has already admitted that adhering to the 4.6% fiscal deficit target would be a challenge on account of lower than expected revenue mop-up and the global financial crisis.

“Shrinking value of money because of persistent high inflation explains the importance of anti-inflationary monetary policy,” the RBI deputy governor said.

Mr Khan said for a country like India with a large percentage of population still living below the poverty line, inflation works as a regressive tax.

“Economic welfare of the population at large could be enhanced primarily through higher growth, that too in a low and stable inflation environment. That suggests why balancing growth and inflation becomes so important to monetary policy,” he said.

Mr Khan said inflation within the threshold level would not mean erosion in purchasing power since higher growth would also raise the income levels, resulting in increased net purchasing power.

“Unless the benefits of growth get equitably distributed, this net increase in purchasing power may not happen to all.

At the aggregate level, some inflation that coexists with high growth could be welfare maximising.

“At high inflation, particularly above threshold level, growth may, however, moderate, and both high inflation and low growth could erode welfare,” he said.

According to Mr Khan, while the global commodity price index has gone up by more than 85% between February 2009 and October 2011, Indian’s Wholesale Price Index (WPI) during that period has risen by about 27.6%.

“That certainly has led to shrinking value of money. Some of the supply side pressures on the value of money however require better capacity to augment the supply situation.

“Moreover, wages in rural areas and staff remunerations in the corporate sector have grown at rates higher than the inflation experienced in the recent past. The erosion in purchasing power, therefore, is much less than what may appear only from the inflation numbers,” he said.

Mr Khan said recent evidence of growth moderation could be expected to dampen demand side pressures on inflation. He said that in the absence of major supply side risks from global commodity markets, inflation should moderate to about 7% by March 2012.

The RBI raised key policy rates 13 times between March 2010 and November 2011 to curb inflation, before putting a pause to its monetary tightening stance at the mid-quarterly policy review last month.

Inflation has been near double-digit since December 2010.

However, food inflation entered negative zone in late last month and experts say that this will help pull down headline inflation to around 7% by the financial year-end.

India Inc has blamed the high interest rates, which have led to an increase in the cost of fresh borrowings, for hindering fresh investments and leading to industrial slowdown.

Economic growth during the second quarter (July- September) of the current fiscal slipped to 6.9%, lowest in over two years. Industrial production entered negative zone and contracted by 5.1% in October.

Regarding high food prices, which prevailed for most of 2010 and 2011, Mr Khan said a number of factors were responsible for it.

This included demand-supply mismatch, increase in rural wages which led to growth in demand, increase in minimum support prices of some crops, high international prices and problems with the supply chain.

“High inflation is a risk to financial savings, since it can reduce the value of savings accumulated over the years.

Making financial instruments available in the system that could provide an effective hedge against inflation assumes importance in this context,” he said.

Mr Khan added that the RBI, in consultation with the government, is exploring the possibility of issuing inflation indexed bonds (IIBs).

 

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RBI guidelines on Basel III more conservative: Moody’s

 

“We interpret RBI’s draft guidelines as more conservative than the Bank for International Settlements norms and view them as credit positive for the banking sector,” Moody’s Weekly Credit Outlook said

New Delhi: Rating agency Moody’s on Monday said the Reserve Bank of India’s (RBI) draft guidelines for adoption of Basel III norms, which seek to raise the minimum equity capital of banks, are more ‘conservative’ than those proposed globally, reports PTI.

“We interpret these draft guidelines as more conservative than the Bank for International Settlements (BIS) norms and view them as credit positive for the banking sector,” Moody’s Weekly Credit Outlook said.

In order to strengthen risk management mechanism, RBI issued draft guideline last month.

RBI has recommended a more stringent minimum common equity Tier-I capital of 5.5% against BIS’ 4.5%, it said.

Besides, it said, the central bank has proposed an earlier deadline for the implementation of a 2.5% capital conservation buffer to March 2017, as compared to BIS’ deadline of January 2019.

The draft guidelines reflect the RBI’s policy of ensuring Indian banks have extra stress-absorption capacity if the operating environment worsens, it said.

The proposed guidelines also prompt banks that have used hybrid securities and other innovative debt capital instruments to raise their core equity capital.

In line with BIS norms, it said, the proposed guidelines also focus on quality of capital, with increased emphasis on the loss-absorption capacity of capital rather than its role in supporting business growth.

Under the proposed guidelines, hybrids and other forms of innovative debt capital instruments that banks currently classify as Tier-I capital will no longer qualify as it, owing to their limited loss absorption capacity, it said.

In addition, it said, the proposed guidelines end the practice of making a distinction between upper Tier-II debt capital instruments and subordinated debt in favour of one set of criteria from a capital regime perspective.

Last month, RBI unveiled draft guideline for adoption of Basel III norms and set implementation period of minimum capital requirements to begin from 1 January 2013.

However, it said, the capital conservation buffer requirement is proposed to be implemented between 31 March 2014 and 31 March 2017.

It also said that the instruments which no longer qualify as regulatory capital instruments will be phased out during the period beginning from 1 January 2013 to 31 March 2022.

 

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