India’s Chief Economic Advisor blames auditors for failing India’s economy

• The Chief Economic Advisor pointed out eight indicators that auditors should have disclosed to companies.
  
  
• The survey shows that out of 12 large defaulters, only three to four indicators were flagged by auditors.
  
  
• The government concludes that this is indicative of ‘a market failure of trust’ that happened between 2011 and 2013.
  

India’s Economic Survey has blamed auditors for the huge pile of bad loans that banks have had to lug for the last few years.


The analysis by Chief Economic Advisor (CEA) pointed to eight leading indicators that should have been disclosed to companies — like issues in business performance, weak internal controls or non-compliance with the companies act.


“These indicators should have been ideally flagged by the auditors,” said the Survey while listing the leading and lagging indicators of an impending default.


The survey shows that out of 12 large defaulters, only three to four indicators were flagged off by auditors. The government concludes that this is indicative of ‘a market failure of trust’ that happened between 2011 and 2013. A few large ‘unscrupulous’ businesses created NPAs in the banking system that led to stress for public sector banks.


This statement comes a year after the Prime Minister Narendra Modi also ‘reminded’ chartered accountants of their power. “Your signature is more powerful than the PM’s, and the government also believes the accounts signed by you,” Modi said.


The crisis was compounded as investors started redeeming their investments in liquid debt mutual funds. This triggered panic about non-banking financial companies financiers, causing a crisis in the sector.


Leading indicators:

• Issues in performance of business
  
• Weakness in internal controls
  
• Non-compliance of provisions of Companies Act
  
• Qualified/Disclaimer of audit opinion
  
• Excess managerial remuneration
  

Lagging indicators:

• Default in repayment of borrowings
  
• Insufficient provisioning/impairment loss
  
• Going concern issues
  

Why the health of public sector banks matters

In order to grow into a $5 trillion economy by 2025, the economy needs at least eight Indian banks to breach the top 100 list globally. And, the banking sector needs to be efficient in its functioning, in order to support growth.


However, credit growth among public sector banks declined significantly since 2013 — and has since remained anaemic. Remaining within the single digits for the past five years, it was a mere 4% in 2019.


“This needs to be remedied because the economy needs PSBs to perform to their fullest

potential and support economic growth rather than pullback lending, which has a

detrimental effect on growth and welfare,” said the Economic Survey 2019.


Public sector banks account for 70% of the banking sector, in terms of market share. However, in 2019, they lost ₹66,000 crores to bad loans. Overall, public sector banks account for 85% of the total number of bank frauds. Their gross NPAs are around ₹7.4 lakh crores.


SEE ALSO


Indian banks found ₹2.6 lakh crore frauds in first six months of FY20– only because RBI looked ‘closely’


India’s largest bank was caught lying about its profits for 3 years but no one got punished, according to an expose