Reduction of bank branch audits—a right step-MONEY LIFE

R Balakrishnan

The savings in costs by doing away with branch audits is one gain. The other is to put more responsibility on the main auditor, who now has to give his opinion without hedging that he has depended on another person to audit branches

A report in a leading business newspaper titled ‘CAs lobby against RBI plan to reduce audits’ mentions that the Reserve Bank of India (RBI) is likely to scrap the ‘branch audits’ for PSU banks. This is a long overdue move and should be welcomed. Branch audits have lost their relevance in the age of technology. Core banking ensures that routine checks like interest calculations, branch transfers, credits, etc, are captured at a centralised place. Credit decisions are also getting centralised. Thus, branch audits become totally redundant.

In any case, branch auditors were not very relevant in the scheme of things. They had no role to play in the accounts finalisation, where the main auditors (or a panel of auditors) were the prime movers. Of course, this hits the chartered accountancy (CA) firms which used to get this lucrative business from the PSU banks through a tender system rather than on competencies or merits. They will also raise objections saying that frauds will go undetected. In fact, rare is the fraud that has been unearthed by a branch audit. The auditors are under pressure of the bank managements at all times and have to give in to what the bank wants. If a bank is serious about finding/checking frauds, unless the bank is willing to bare its books, nothing can be found out. Maybe an RBI inspection could throw out something. However, in this era, documentation alone will never be a point to bring frauds out into the open. Technology helps in perfecting documentation. Banks will disclose what they want to, audit or no audit.

In any case, branch audits are never an annual feature for each and every branch. In any case, one branch used to get audited only once in two or three years. In most private sector banks, with total centralisation, the role of a branch is limited to accepting deposits and executing orders from the head office. All lending decisions are through a standard template controlled and supervised from the head office. The branch is merely an outpost and nothing more. The costs of branch audits far outweigh gains, if any.

There was also a ridiculous practice of having a credit panel with outside representatives. Fortunately that has been discontinued and credit panel is limited to bank insider representation alone.

The savings in costs by doing away with branch audits is one gain. The other is to put more responsibility on the main auditor, who now has to give his opinion without hedging that he has depended on XYZ to audit branches, etc.

Even branch advances can be audited by the main auditors sitting at the head office. Data transmission is a breeze. It would also help some PSU banks to get more centralised and remove discretion away from small branch managers or regional offices. Banks like ICICI have successfully centralised lending and it is indeed the global practice. This will iron out kinks in lending and make frauds less widespread.

Maybe doing away with the branch audits is a good step to help focus on better systems and controls within the PSU banks.

The author can be reached at balakrishnanr@gmail.com