CAG for bringing RBI under audit scanner

Massive financial frauds bleeding the national exchequer has prompted the national auditor give a call to audit the Reserve Bank of India (RBI). As per present practice, the CAG does not audit the RBI as its auditors are appointed by Central government under the provisions of the RBI Act, which restrains the apex auditor from reviewing transactions of the RBI.

Also, at present CAG conducts only limited audit of other financial sector regulators like Stock Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA). 

The national auditor is, however, not authorised to undertake performance audits of these regulators.

Since risks and vulnerabilities from financial frauds are substantial, CAG Shashi Kant Sharma on Friday suggested that there should be a comprehensive strategy to deal with them in order to safeguard the integrity of financial system as well as enormous public interest. He was speaking at the Associated Chambers of Commerce and Industry of India (ASSOCHAM).

Citing examples of the United States and United Kingdom, Sharma said, “The examples (of the US and UK) cite the moves being made to bring forth more accountability and transparency on financial sector regulators.”

Voicing concern over rampant financial frauds creating a huge loss worldwide, the CAG said, “Financial irregularities are inherently destabilising and have several deleterious consequences such as undermining confidence in financial markets, diverting savings from productive to unproductive uses, etc.”

Stating that in a country that is largely financially illiterate, Sharma said that the possibility of fraud is much higher. 

“Promoting financial literacy is a long term strategy for mitigating this risk. At the same time, the regulators have to work together to not only enhance their capacity to deal with financial frauds, but also to remove any regulatory arbitrage,” the CAG said while addressing a national meet on financial frauds.

There are various schemes that involve collection of funds through channels other than the prudentially regulated channels of banking, insurance and capital markets such as collective investment schemes, chit funds, multi-level marketing companies, non- banking finance companies (NBFC), Nidhi companies, etc. that can escape the regulatory remit of RBI. This is a potential regulatory gap that can be exploited by unscrupulous operators. The NBFC sector has millions of customers and is also potentially vulnerable to frauds.