Tag: shaktikanta das

Ambani backs data privacy, cryptocurrency bills, BFSI News, ET BFSI

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New Delhi, Billionaire Mukesh Ambani on Friday backed the proposed data privacy and cryptocurrency bills, saying India is putting in place the most forward-looking policies and regulations. Ambani, who has been a votary of Indians owning and controlling their own data and the nation drafting strict rules around how digital information is stored and shared, said nations have the right to build and protect strategic digital infrastructure.

Stating that data is the ‘new oil’, he said every citizen’s right to privacy has to be safeguarded.

“India is putting in place the most forward-looking policies and regulations,” he said at the Infinity Forum, hosted by International Financial Services Centres Authority (IFSCA).

The country, he said, already has a great framework of digital identity – through Aadhaar, digital bank accounts and digital payments.

“We are on the verge of introducing data privacy bill, and the cryptocurrency bill. I think we are on the right track,” he said.

The comments came as the government looks to bring a new bill in Parliament to treat cryptocurrencies as a financial asset while safeguarding small investors. The legislation may stipulate a minimum amount for investments in digital currencies while banning their use as legal tender.

The legislative agenda for the current winter session of Parliament that started on November 29 lists bringing of a bill that seeks to prohibit all private cryptocurrencies except “certain exceptions to promote the underlying technology of cryptocurrency and its uses.”

While the government is considering taxing gains from cryptocurrency, the Reserve Bank of India wants a complete ban on digital currencies as it feels this could affect the nation’s macroeconomic and financial stability.

“Data and digital infrastructure is strategically important for India and every other nation in the world. Every country has the right to build and protect this strategic digital infrastructure,” he said adding a uniform global standard was needed so that cross-border transactions, collaborations and partnerships are not hampered.

Stating that every citizen’s right to privacy has to be safeguarded, he said the right policies and the right regulatory framework have to balance this with the nation’s need to guard data and digital infrastructure.

Ambani, chairman and managing director of Reliance Industries Ltd, said that he was a big believer in blockchain technology.

“I believe in blockchain technology and this is different from cryptocurrency,” he said, adding, “Blockchain is very important for a trust-based, equitable society.”

While the bill for regulating cryptocurrency is in the works, RBI Governor Shaktikanta Das is among those who feel that the blockchain technology underpinning cryptocurrencies could exist on its own, even without the currency.

“Using blockchain, we can deliver unprecedented security, trust, automation and efficiency to almost any type of transaction,” Ambani said. “It can be used to modernize our supply chains that form the lifeblood of our economies.”

India is now well on its way to transforming itself into a leading Digital Society, having put the digital infrastructure, and the regulatory framework in place.

“Data is indeed the ‘new oil’. But the new oil is fundamentally different from the traditional oil. Traditional oil was extracted only at select places – thus, it created wealth only for some countries. In contrast, the new oil — that is Data — can be generated and consumed everywhere and by everybody. It has the potential to create value equitably, across sectors, across geographies, across economic classes,” he said.

His comments come against the backdrop of a debate on how India should balance user protections with support for its digital economy in the world’s fastest-growing major internet market. Foreign companies and hundreds of home-grown startups have flourished amid a dearth of regulation.

Ambani’s Jio has supercharged internet adoption, helping crash data prices since launch in 2016, and his group has now created an online-to-offline retail platform take on the likes of Amazon and Walmart-backed Flipkart, which are both betting big on India’s e-commerce market.

The country, he said, is transitioning fully from 2G to 4G. “We are in the process of creating an equally affordable ecosystem of devices to enable greater adoption, supported by a faster rollout of optical fiber, cloud, and data center infrastructure.

“The next step will be the connectivity of machines, devices and vehicles, which is the Internet of Things. With 5G rollout next year in India, we are on our way to having one of the most advanced digital infrastructures anywhere in the world.”

Ambani said India is well on its way to transforming itself into a leading Digital Society, having put the digital infrastructure, and the regulatory framework in place.

“Finance is at the heart of everything, and I believe we are in very early stages of sporadic digitization, and with various new-age technologies emerging, the opportunity is in adopting a decentralised model of finance,” he said.

There will be centralised government and central bank policies, but there will be a path to decentralized technological solutions where finance will be enabled and available to everybody, Ambani said.

Real-time technologies will help settle trades, not in days or hours, but in real-time. Smart contracts will become a reality.

“Convergence of real-time technologies, distributed ledger, blockchain, smart tokens etc with physical infrastructure using IoT will redefine the decentralized financing sector in a way that we have never imagined,” he added.



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Covid resurgence will force RBI to keep the monetary tap open, bond market shows, BFSI News, ET BFSI

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NEW DELHI: Central banks around the world sure have their work cut out. Just when monetary authorities were preparing the ground for a reversal of ultra-loose policies adopted in response to the coronavirus crisis, the virus, it seems, has taken new and potentially more dangerous avatars.

From bracing for interest rates in major economies to head northward sooner than later, global bond markets on Thursday took a 360-degree turn.

With a new and possibly even more deadly variant of the coronavirus being detected in South Africa, Botswana and Hong Kong, a fresh outbreak of the disease may well be on the cards. When this is coupled with a recent resurgence of Covid-19 in Europe — which has been accompanied by attendant restrictions on activity — the risk to global growth has intensified significantly.

The price action in global bond markets on Thursday showed this. Instead of getting ready for imminent policy normalisation, the bond markets seemed to be expressing the view that monetary accommodation would stay for a while longer. Yields on 10-year US Treasury papers nosedived a whopping 12 basis points on Thursday and were last at 1.51 per cent.

Clearly, investors are betting on the helping hand of central bank interventions to return.

THE INDIAN STORY
Indian sovereign bonds on Thursday enjoyed their best day in three-and-a-half weeks, with yield on the 10-year benchmark 6.10 per cent 2031 paper dropping four basis points.

Prior to the detection of the fresh variant in South Africa, a strong view in the market was that the Reserve Bank of India would start the process of raising interest rates at its next policy statement, on December 8, by raising the reverse repo rate and, therefore, narrowing the width of the liquidity adjustment facility corridor.

The central bank has already paved the way for the step as the quantum of funds withdrawn and the cutoff rates set at variable rate reverse repo operations has pushed rates on money market instruments closer to the repo rate of 4 per cent rather than the reverse repo rate of 3.35 per cent.

However, even as money markets may have aligned to the new expectation of the reverse repo rate, the act of raising it would itself have significant implications – namely that the ultra-loose accommodation is now well and truly going to be reversed. Because one would hardly expect the central bank to reverse its stance once it has officially started the process of lifting interest rates.

Now, however, market players are betting that there is a strong possibility that Governor Shaktikanta Das will keep all rates on hold and say that the central bank wishes to obtain more clarity on the global situation (and the spillovers for India) before raising any benchmark rates.

For India, another salutary impact of the new risk to global growth is a decline in international crude oil prices. Even as the government has reduced excise duty on petroleum products, the extent of the rise in oil prices over the last couple of months had emerged as a significant risk to domestic inflation, while worsening the outlook on the trade deficit.

Crude oil futures on the New York Mercantile Exchange slumped 3 per cent on Thursday, while Brent crude, the global benchmark, shed 2.2 per cent.

“The market’s view is changing; that is clearly perceptible from today’s move,” ICICI Securities Primary Dealership’s head of trading and executive vice-president Naveen Singh said. “There was almost a consensus that the reverse repo will be hiked, especially as market rates have aligned to a higher rate. But now there is a view that the RBI will maintain the status quo and wait for more details about whatever is happening in Africa and Europe. Because they cannot hike and then cut again if Covid were to worsen.”

While the yield on the 10-year benchmark bond may face hurdles when it comes to falling below the psychologically significant 6.30 per cent mark, for now, traders do not see it revisiting the 6.40 per cent mark, where it was hovering around a couple of weeks ago.

Hardening inflation can take a backseat for now, bond traders seem to be saying. The spotlight has once again squarely turned on protecting economic growth from what seems to be a hydra-like disease – two new heads sprout whenever one is severed.



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Crypto industry urges govt to take nuanced approach, asks investors to remain calm, BFSI News, ET BFSI

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The cryptocurrency industry on Wednesday urged the government to take a nuanced approach towards regulating crypto assets in India and asked investors in the country to remain calm and not arrive at a rushed conclusion, a day after the government listed for introduction a Bill to ban all such cryptocurrencies, with some exceptions.

‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021′, to be introduced in the winter session of Parliament beginning November 29, seeks to “create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses”.

BuyUcoin CEO Shivam Thakral said it expects the Bill to accommodate the aspirations of Indian crypto owners, Indian crypto entrepreneurs, and investors who have put their faith in India’s crypto growth story.

“The crypto Bill should be flexible enough for young blockchain projects to flourish and we strongly believe that there is a strong case for a standard process for new cryptocurrencies before they get listed on any exchange in India for trading.

“I think popular crypto-assets like Bitcoin and Ethereum will be pre-approved by the regulators for getting listed on the exchange. We also request the government to give immediate clarity on the taxation and filing of crypto assets,” Thakral said.

CoinSwitch Kuber founder and CEO Ashish Singhal said the industry has been actively communicating with all stakeholders keeping investor protection at the forefront.

“Our discussions in the last few weeks indicate there is a broad agreement on ensuring that customers are protected, financial system stability is reinforced and India is able to take advantage of the crypto technology revolution…

“As of now, I urge all crypto asset investors in the country to remain calm, do their own research before arriving at a rushed conclusion,” said Singhal, who is also the co-chair of the Blockchain and Crypto Assets Council (BACC).

Cryptocurrency exchange CoinDCX’s spokesperson said a well-assessed and thought-through regulation will pave the way for greater adoption of the technology and will help millions of Indians embrace this new-age asset class.

OKEx.com CEO Jay Hao said India is home to the highest number of crypto owners in the world and the onus lies on the government to protect the interest of a large number of crypto investors in the country.

“We urge the government to take a nuanced approach towards regulating crypto assets in India. With the positive outcome of the cryptocurrency Bill, India will embark on an exciting journey of becoming the global leader in crypto, Defi, and NFTs,” Hao said.

Currently, there is no regulation or any ban on the use of cryptocurrencies in the country. Against this backdrop, Prime Minister Narendra Modi earlier this month held a meeting on the cryptocurrencies with senior officials, and indications are that strong regulatory steps could be taken to deal with the issue.

There has been a rising number of advertisements, featuring even film stars, promising easy and high returns on investments in cryptocurrencies in recent times, amid concerns over such currencies being allegedly used for luring investors with misleading claims.

Last week, the Standing Committee on Finance, chaired by BJP member Jayant Sinha, met the representatives of crypto exchanges and BACC, among others, and arrived at a conclusion that cryptocurrencies should not be banned, but it should be regulated.

The RBI has repeatedly reiterated its strong views against cryptocurrencies saying they pose serious threats to the macroeconomic and financial stability of the country and also doubted the number of investors trading on them as well as their claimed market value.

RBI Governor Shaktikanta Das has also reiterated his views against allowing cryptocurrencies saying they are a serious threat to any financial system since they are unregulated by central banks.

The RBI had announced its intent to come out with an official digital currency, in the face of proliferation of cryptocurrencies like Bitcoin about which the central bank has had many concerns.

Private digital currencies/ virtual currencies/ crypto currencies have gained popularity in the past one decade or so. Here, regulators and governments have been sceptical about these currencies and are apprehensive about the associated risks.

On March 4, 2021, the Supreme Court had set aside an RBI circular of April 6, 2018, prohibiting banks and entities regulated by it from providing services in relation to virtual currencies.



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Cryptocurrency to be regulated and gains taxed; govt to amend I-T laws, BFSI News, ET BFSI

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With the consensus on allowing cryptocurrencies gaining momentum, the government is mulling changes in the income tax laws to bring cryptocurrencies under the tax net, with some changes that could form part of the budget next year, a top official said.

Revenue secretary Tarun Bajaj said that in terms of income tax, some people are already paying capital gains tax on the income from cryptocurrency, and in respect of goods and services tax (GST) also the law is “very clear” that the rate would be applicable as those in case of other services.

“We will take a call. I understand that already people are paying taxes on it. Now that it has really grown a lot, we will see whether we can actually bring in some changes in law position or not. But that would be a budget activity. We are already nearing the budget, we have to look at that point of time,” Bajaj told PTI in an interview.

Asked if a provision of TCS (tax collected at source) could be introduced for crypto trading, the secretary said “if we come up with a new law then we will see what is to be done”.

“But yes, if you make money you have to pay taxes. We have already got some taxes, some have treated it as an asset and paid capital gains tax on it,” he said.

Asked whether people involved in cryptocurrency trading would be categorized as facilitator, brokerage and trading platform and how the taxation would be done under GST, Bajaj said “there would already be such things available in other services also. So whatever GST rate they are taxed at, that will be applicable on them.”

“They have to get themselves registered. The GST law is very clear. If there is an activity, if there is a broker who is helping people and charging brokerage fee, GST would get charged,” he said.

Separately, the government is likely to introduce a bill on cryptocurrencies during the Winter Session of Parliament beginning November 29, amid concerns over such currencies being allegedly used for luring investors with misleading claims.

Notably, there have been a rising number of advertisements, featuring even film stars, promising easy and high returns on investments in cryptocurrencies in recent times.

Currently, there is no regulation or any ban on use of cryptocurrencies in the country. Against this backdrop, Prime Minister Narendra Modi, last week, held a meeting on cryptocurrencies with senior officials and indications are that strong regulatory steps could be taken to deal with the issue.

Earlier this week, the Standing Committee on Finance, chaired by BJP member Jayant Sinha, met the representatives of crypto exchanges, block chain and Crypto Assets Council (BACC), among others, and arrived at a conclusion that cryptocurrencies should not be banned, but it should be regulated.

The RBI has repeatedly reiterated its strong views against cryptocurrencies saying they pose serious threats to the macroeconomic and financial stability of the country and also doubted the number of investors trading on them as well as their claimed market value.

RBI governor Shaktikanta Das too earlier this month had reiterated his views against allowing cryptocurrencies saying they are a serious threat to any financial system since they are unregulated by central banks.

The Supreme Court in early March 2020, had nullified the RBI circular banning cryptocurrencies. Following this on February 5, 2021, the central bank had instituted an internal panel to suggest a model of the central bank’s digital currency.

The RBI had announced its intent to come out with an official digital currency, in the face of proliferation of cryptocurrencies like Bitcoin about which the central bank has many concerns.

Private digital currencies/virtual currencies/crypto currencies have gained popularity in the past one decade or so. Here, regulators and governments have been sceptical about these currencies and are apprehensive about the associated risks.

It can be noted that on March 4, 2021, the Supreme Court had set aside an RBI circular of April 6, 2018, prohibiting banks and entities regulated by it from providing services in relation to virtual currencies.



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RBI Governor Das urges banks to be investment-ready as recovery gathers pace, BFSI News, ET BFSI

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RBI governor Shaktikanta Das

Shaktikanta Das, governor of Reserve Bank of India, has asked banks to be investment-ready when the private Capex cycle picks up, as the pandemic-battered economy is on a strong recovery path that will demand huge investments to sustain in the long run.

Crediting the faster-than-expected recovery primarily to the improved vaccination pace and the resultant steady fall in the infection caseload, Das said this has led not only to lower extreme health outcomes like mortality/ hospitalisation but also boosted consumer confidence, which was visible in the festival demand.

Addressing an event by State Bank of India, Das said it is heartening to note that the economy is gradually getting back on its feet after the devastating second wave, which is very visible from the numerous high-frequency indicators that suggest that economic recovery is taking hold.

Since contact-intensive services are yet to regain the lost capacity despite rapid improvement in the recent period, it is clear that there still exists a significant gap in private consumption and investment relative to their pre-pandemic levels in FY20.

So, while the economy is picking up pace, it is yet to cover a lot of ground before it gets broad-based and entrenched. This points to the need for sustained impetus so that growth could return to or, better still, exceed the pre-pandemic trend, he said.

The growth triggers

Stating that the country has the potential to grow at a reasonably high pace after the pandemic, Das pointed to the several factors that are stacked in our favour of faster growth.

First, as a developing economy, it has significant potential to catch up with the rest of the world supported by favourable demographics, improving skill base and strong domestic demand.

Secondly, the government is providing necessary support, especially through Capex and reforms in various sectors like infrastructure, manufacturing and telecom, apart from other institutional changes to boost productivity, ease supply constraints and improve the business environment.

Thirdly, he said the pandemic has opened new opportunities for growth in the digital and green technology and also on account of resetting of global supply chains that could be advantageous to us and finally exports have been a bright spot since recent months and are likely to benefit further from global economic recovery.

With such enabling conditions and supportive policies, I have no doubt that we have a unique opportunity to step up growth as we emerge from the pandemic, Das said.

Private consumption

Calling private consumption as the backbone of overall economic growth, he said private consumption contributes the largest share of aggregate demand with around 56 per cent of GDP and is thus critical for inclusive, durable and balanced growth.

There are many signs that consumption demand triggered by the festive season is making a strong comeback. This would encourage companies to expand capacity and boost employment and investment amidst congenial financial conditions, he said, adding the recent tax cuts on petroleum products will give a further fillip to consumption.

Stating that reinvigorating private investment is crucial to realise the growth potential, Das said various policy measures such as a cut in corporate taxes, taxation reforms, the introduction of a performance-linked incentive scheme for 13 major sectors, enhanced focus on infrastructure development and asset monetisation, and proactive liquidity measures by the RBI etc are all leading to investment demand.



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RBI governor to banks, BFSI News, ET BFSI

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RBI governor Shaktikanta Das on Tuesday asked lenders to proactively identify loans to firms that have turned non-viable but not yet recognised as a non-performing asset (NPA) due to the special dispensation during Covid. The governor also asked banks to review the usability of capital for absorbing losses during a crisis.

Pointing out that numerous high-frequency indicators are showing that economic recovery is taking hold, Das said that there have been several resolution frameworks announced in the wake of the pandemic. “As the support measures start unwinding, some of these restructured accounts might face solvency issues over the coming quarters. Prudence would warrant proactive recognition of such non-viable firms for pragmatic resolution measures,” said Das.

Speaking at an economic conclave organised by the State Bank of India, Das noted that banks have weathered the Covid shock better than expected and, according to early trends, their bad loans and capital position has improved in September 2021 from their levels in June 2021. He said that the profitability metrics of banks were highest in several years. However, the improved parameters partly reflect regulatory relief provided to banks during Covid as well as fiscal guarantees and financial support given by the government, he said.

“Certain concerns have re-emerged from the crisis which warrant our attention. Most importantly, we are faced with the question of capital and provisioning buffers of banks, their adequacy and resultant usability during a crisis,” said Das. He urged banks to focus and further improve their capital management processes to envisage the capacity for loss absorption as an ongoing responsibility of the lending institutions.

In his speech, the governor also cautioned banks on the “technological invasion” that they face. “A word of caution is in order: Globally, the ‘phygital’ revolution has played out into several collaborative models between banks, NBFCs and fintech players such as incubation, capital investment, co-creation, distribution and integration… it must be recognised that the risks ultimately lie in the books of banks and NBFCs and hence the collaboration should be appropriately strategised,” Das said.



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Bank boards must diligently discharge oversight functions: RBI Governor

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Pointing out that both bank managements and boards had become cozy in their roles, RBI Governor Shaktikanta Das underscored the active role of boards, especially in challenging the proposals of the management.

Banks should ensure that their business models and business strategies are conscious choices, after a robust strategic discussion in the board, instead of being a mechanical ‘follow the market’ approach, Das said at the SBI’s Banking and Economics Conclave here on Tuesday.

Growth strategies

The Reserve Bank chief emphasised that in their endeavour to grow, banks should avoid the herd mentality and look for differentiated business strategies.

He said the RBI has started taking a close look at the business models and strategies of banks.

“Certain banks had followed the high risk and high return business strategy, with a skewed priority for serving only the interest of their investors.

“The active role of the board, especially in challenging the proposals of the management, thus becomes critical,” Das said, adding that this will contribute towards a more diligent and balanced approach to decision making.

Das said that the RBI’s intention is not to create a divergence between the board and the management.

The latter has a certain role and the former a certain role. And each is expected to play that role, he said.

Referring to his earlier remark that the board should challenge certain norms, certain risk-taking practices and certain models of the management, Das said this is only to ensure that right decision is taken.

“And the board, which is in charge of oversight of the bank, is expected to play that role as a guide and to discharge its oversight functions in a prudent manner… Let me clarify, we don’t want a fight between the board and the management,” he said.

Responsible governance

The Governor noted that the board carries the responsibility of being the guardian of the trust that depositors have reposed in a bank.

A bank’s responsibility towards depositors should, therefore, be weighed against its responsibility towards shareholders of the bank.

“To ensure good governance, the Reserve Bank has high expectations from the oversight role of the board, its composition, directors’ skill profile, strong risk and compliance structure and processes, more transparency and a robust mechanism of balancing various stakeholder interests.

“Thus, business priorities need to be complemented with responsible governance and ethical actions,” he said.

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RBI governor asks banks not to let down their guard, BFSI News, ET BFSI

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RBI governor Shaktikanta Das on Tuesday met with bank chiefs and asked them to remain vigilant to any emerging signs of vulnerabilities and take timely remedial measures to mitigate the risks. Even as Das acknowledged the resilience of the banking sector, the central bank sought to beef up pre-emptive action against weak banks by reworking its prompt corrective action (PCA) norms to enable supervisory intervention at the right time and use of lending restrictions as a tool for market discipline.

The note of caution comes at a time when there is increased optimism in respect of the economy even as pandemic-related stress continues to be felt in some sectors. Bankers have started talking of recovery even as several countries in the world are going through a third phase of lockdowns.

Das on Monday held separate meetings with the MDs and CEOs of public sector banks and some private banks through videoconferencing. He advised banks to take timely remedial measures to mitigate the risks and maintain the stability of not only the institutions themselves but also of the overall financial system. Several other matters, including credit flows, especially to micro and small enterprises, were also discussed during the meetings.

Das sought feedback from bank chiefs on the outlook for stressed assets and measures for mitigation, pricing of risks and the collection efficiencies experienced by banks. He also asked banks about their engagement with fintech entities. This was the first meeting with banks after Das was granted a fresh three-year term by the government last week. The meeting was attended by RBI’s deputy governors M K Jain, M Rajeshwar Rao and T Rabi Sankar.

The new norms for PCA come after most weak banks have exited the lending restrictions imposed by the central bank under its earlier framework for early corrective action. A record number of 11 banks were placed under PCA after banks saw a surge in bad loans following RBI’s asset quality review in 2016.

“The PCA framework does not preclude the RBI from taking any other action as it deems fit at any time, in addition to the corrective actions prescribed in the framework,” RBI said. Bankers said that in the past banks were placed under PCA based on their audited financial results and now the indications are that the RBI might impose the restrictions if it feels that they are required based on its supervision.

On Tuesday, RBI deputy governor Jain said that the central bank was also focusing on governance reforms. He said that banks need to put in place governance standards to be worthy of public trust.

“Being highly leveraged entities and with the interconnectedness, there must be a separation between ownership and management, so that they operate on professional lines,” he said.



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RBI board reviews economic situation, BFSI News, ET BFSI

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The Central Board of Directors of the RBI on Friday reviewed the current domestic and global economic situation and challenges.

The board also deliberated upon possible measures for addressing the emerging challenges, the Reserve Bank of India (RBI) said in a release.

The 591st meeting of the board was held under the Chairmanship of Governor Shaktikanta Das. His tenure as the Governor has been extended by three years up to December 2024.

“The board also congratulated the Governor on his reappointment,” the central bank said.

According to the release, the board also discussed the working of sub-committees of the central board and activities of a few Central Office Departments, including the nationwide survey among bank customers regarding banks’ grievance redress system and the functioning of the Ombudsman schemes.

Deputy Governors Mahesh Kumar Jain, Michael Debabrata Patra, M Rajeshwar Rao, and T Rabi Sankar attended the meeting. Other directors on the board — N Chandrasekaran, Satish K Marathe, S Gurumurthy and Sachin Chaturvedi — were also present.

Besides, Debasish Panda, Secretary, Department of Financial Services and Ajay Seth, Secretary, Department of Economic Affairs, attended the meeting.

Das was appointed the RBI’s 25th Governor on December 11, 2018 for a period of three years after the abrupt resignation of his predecessor Urjit Patel.

He is the first RBI Governor to get extension after the BJP-led government came to power in 2014.



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Need to improve quality, depth of audit: RBI Governor Shaktikanta Das

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Undesirable practices and structures, including incorrect assumptions in determining provisioning requirement for financial assets, diversion of funds and/or transfer of profits to connected parties, and real transactions getting camouflaged beneath various layers of IT solutions, should draw the attention of the auditors, according to Reserve Bank of India Governor Shaktikanta Das.

“One of the important roles of audit is to check the so called smart accounting practices, if any, followed by management to overstate profits or understate expenses / liabilities,” Das said in his address at the National Academy of Audit and Accounts (NAAA), Shimla.

Referring to Ind-AS (Indian Accounting Standards), which has been implemented for all listed companies (other than banks) in India, including NBFCs having net worth of more than ₹250 crore, the Governor observed that within Ind-AS, Ind-AS 109 with Expected Credit Loss (ECL) approach allows the management to exercise discretion and judgment in determining the provisioning requirement for their financial assets.

Das said: “Such flexibility and forward-looking nature of assessment, however, poses the ‘model risk’,that is, the model may rely on incorrect assumptions and may be far from representing the real-life scenarios. “This has been observed in several cases. Hence, auditors are expected to test the models used by the entities, challenge the management and validate the model outputs.”

Diversion of funds

The Governor said of late, several instances of related party transactions, without following ‘arms-length’ principle and established transfer pricing mechanism, have been observed.

“There have been instances of diversion of funds and/or transfer of profits to connected parties through various means – intra-group loans on favourable terms, over or under invoicing of transactions, asset transfers without fair valuation, etc,” he said.

Das emphasised that auditors need to identify and thoroughly scrutinise related or connected party transactions to ensure that there is no undue transfer of income or assets.

‘See-through’ IT layers

The Governor also flagged cases of manipulation and misstatement of the true nature of financial statements by employing opaque technological means (IT black boxes).

“Real transactions are camouflaged beneath various layers of IT solutions by a few entities. As such, auditors need to be technologically savvy and be able to ‘see-through’ the layers of information technology to detect the real nature of hidden transactions,” he said.

Das said since RBI, as the supervisor of the financial system, relies and leverages on the work done by auditors, the audit professionals are being sensitised through various fora to improve the quality of their reporting

He highlighted that:“We are constantly engaged with individual auditors, audit firms and the Institute of Chartered Accountants of India (ICAI) to improve the quality and depth of audit. A lot of work has been done in this area, but lot more needs to be done.”

Good governance

The Governor said the management has the responsibility for demonstrating, through its actions, the importance of ethical conduct.

While this is relevant for all businesses, it is even more important for financial institutions which hold public trust and depositors’ money in fiduciary capacity.

Das felt that financial sector entities, the audit community and the financial sector regulators and supervisors have to work together and take proactive steps to ensure good governance and ethical practices to build a strong and resilient financial sector.

Tech adoption

The Governor stressed that the auditing profession cannot afford to lag in adoption of technology. “Adopting technology tools such as computer-assisted audit tools and techniques (CAATTs) through constant upgradation and integration of new technologies will bring in a lot of efficiency in audits.

“In parallel, it has to be kept in mind that adoption of such technology tools for auditing cannot replace professional judgment,” he said.

A holistic approach is required while integrating technology tools in audit. The Governor said:“The profile of tomorrow’s auditor will be that of a critical, yet constructive challenger, with a clear focus on public interest and quality audits. There is a need to be even more professional, qualified, impartial, value-driven, ethical and display awareness and foresight.”

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