India's top official auditor on Friday made a case for an audit of the Reserve Bank of India (RBI) as a "thought for the future" and said a large part of the bad loans of commercial banks was the result of fraud, the bulk of which appeared irrecoverable.
"The Comptroller and Auditor General (CAG) of India doesn't audit the RBI.
In view of the large incidents of financial frauds, it is a thought for the future - - whether we should consider the financial factors, effectiveness of the bank, " CAG Shashi Kant Sharma said here on Friday.
"The objective should be to achieve the effectiveness and functioning of the financial sector and to reduce the risk and vulnerabilities of the financial system in public interest - - to enhance the capability to deal with financial frauds, " Sharma told an Assocham conference here.
He said in Britain a legislation pased this year requires the Bank of England to not only consult the CAG, but also authorises the audit agency to examine the efficiency and effectiveness with which the British central bank uses its resources and report its findings to the House of Commons.
As regards the bad loans commercial banks, often referred to as non - performing assets, which has also become a matter of grave concern, Sharma felt a large part of it was due to exposure using fraudulent means.
"There is a significant part of NPAs that amount to fraudulently obtained advances, " the auditor said at the conference on financial and corporate frauds.
"There is also the belief that a large part of these advances may have been transferred abroad and may never be recovered, " said Sharma, as growing non - performing assets of commercial banks have become a matter of grave concern in recent months.
"In recent times, there have been frauds against institutions, frauds committed against banks, especially public sector banks that are struggling.
Banking fraud can be related to technological flaws related to both the employees and the customers of the banking system, " Sharma added.
The top auditor also mentioned chit funds regulated by the state governments and the non - banking financial companies (NBFCs) as other areas of "big risks" due to their vulnerability to easy frauds.
Ten state - run banks suffered losses of over Rs 15, 000 crore in the fourth quarter of 2015 - 16 due to provisioning to cover for bad debts.
Punjab National Bank, for instance, made an operational profit of Rs 12, 000 crore in 2014 - 15, but declared a record loss because of such provisioning.
As per a study by Assocham, commercial banks will need to write off their losses between 40 and 70 per cent in at least 240 companies, which are under heavy debt, mostly in steel, construction, power, textiles and infrastructure.
The study, conducted jointly with India Ratings and Research, also suggested asset reconstruction to cut their losses with the help of revamped asset reconstruction companies (ARCs) sector to help banks achieve a sustainable level of bank debts.
The Reserve Bank of India (RBI) estimates that the gross non - performing advances, which rose to 7. 6 per cent of gross advances in March 2016 from 5. 1 per cent in September 2015, could even top 8. 5 per cent of total assets by March next year.
Finance Minister Arun Jaitley has said that the new bankruptcy code and debt recovery legislation will significantly help the banks deal with stressed assets.
The government allocated Rs 25, 000 crore in 2016 - 17 for the revamp of public sector banks.