A Survey-Based Assessment of Progress in the Implementation of Risk-Based Internal Audit in Indian Banks

In the backdrop of increasing attention paid to the management of risks in banking by regulators world over, the Reserve Bank of India (RBI) proposes to switch over from traditional transaction-based annual inspection of banks to Risk-Based Supervision (RBS). The risk-based approach to supervision aims at differentiating banks in accordance with their risk profiles and introduces a flexible approach to deciding the quantum of supervisory attention and application of supervisory tools. As a corollary to RBS, banks were advised to migrate toward an internal inspection/audit corresponding to the RBS framework. Risk-Based Internal Audit (RBIA) was introduced formally with the release of a Guidance Note by RBI in 2002 calling upon banks to gradually switch over from traditional transaction-based internal inspection/audit to RBIA. RBIA has been implemented in Indian banks for over eight years now. However, in so far as the progress of implementation of RBIA in Indian banks is concerned, there are no reliable sources/studies, and the literature on RBIA in the Indian context is scanty. This survey study assesses the progress made by banks in implementing RBIA as per the RBI guidance note, as also the organizational preparedness of banks in terms of policy framework, infrastructure, quantity and quality of audit personnel, IT support, etc. The study reveals that banks in India have adopted a staggered approach toward the implementation of RBIA and that the progress has been uneven amongst banks. The formation of a task force of senior executives and development of a board approved RBIA policy were spread over the years 2001-2009. All banks in India have implemented RBIA of branches, but many of them have not covered other activities/locations which form a major part of their business activities. In relation to the RBI guidance note, there are some significant gaps in the RBIA process adopted by banks. These have been identified by the researcher and suggestions have been made to the banks and RBI for improving the implementation and effectiveness of RBIA.