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Editorial Notes

Editorial Notes 12th December 2016

Bank’s capital erosion; Importance of effective internal audit; Internal audit mechanism in Indian banks; Importance of autonomy in auditing; Simultaneous polls.
By IT's Editorial Notes Team
December 12, 2016

 

GS (M) Paper-2: “Important aspects of governance”
GS (M) Paper-2: “Issues and challenges pertaining to the federal structure”

 

Why simultaneous polls is not a right proposal

Introduction:

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  • The Niti Aayog recently circulated a discussion paper on how Lok Sabha and assembly elections in the country can be held simultaneously.
  • The paper suggests that the states scheduled to hold elections between 2018 and 2021 can go to the polls in 2019, along with the Lok Sabha elections, by reducing or extending their assembly tenures by three to 15 months.
  • The rest can be taken up with the 2024 Lok Sabha elections in the same way.
  • The rationale behind the proposal is that it would “help reduce expenditure, end policy paralysis and save time”.

Why the proposal is flawed?

  • Policy paralysis often comes with centralisation of powers, when ministers take to campaigning more than the work they ought to do and when the government isn’t sure if its policies are really intended to benefit the people.
  • As for expenditure, the data for the past 15 years on what the government spends to hold elections show that it has risen in sync with the inflation rate and accounts for a minuscule share of the budget spend.
  • It is assumed that once a party is elected to power, at the Centre or in the states, it will complete a five-year term, or that the government at the Centre and the states will all go at the same time. It is assumed that political coalitions will be stable, at least for five years, at all levels. None of these has held true in independent India’s political history.
  • Research shows that the Indian voter has increasingly switched to voting for the same party, when elections to the Lok Sabha and state assemblies are held together. This behavior held true for 68% of voters in states where simultaneous polls were held in 1999. The figure rose to about 77% in 2004 and 2009 and in 2014, when Modi swept to power it jumped 86%.
  • As of now, the prospects of winning the next Lok Sabha elections in 2019 appear better for the ruling coalition than the opposition. So, if the suggestions made in the Niti Aayog paper were to be implemented, the BJP would stand to gain.
  • It is also assumed that assembly and Lok Sabha elections are fought on the same issues and on the same merit, or that campaigns can seamlessly address local and national issues when these elections are held simultaneously.
  • The world’s most powerful democracy, the United States, stays in perennial election mode. The US House of Representatives goes to the polls every two years and the Senate, partially, also every two years, and the president is elected every four years.

Also, frequent elections aren’t bad because they cost money. They are bad when they are occasioned by a fragmented polity and eroding legitimacy of political parties, as has been India’s experience over the past three decades.

The solution lies in cleaning up our political system, building accountability on the part of our politicians and political parties, educating our voters, and so on. Simultaneous elections are no answer.

[Ref: Hindustan Times]

 

GS (M) Paper-3: “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.”
GS (M) Paper-3: “Inclusive growth and issues arising from it.”

 

Better internal watchdogs in Banks

Introduction:

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  • Currently banks face risks have led to capital erosion and further requirement of own funds to maintain international standards of capital and leverage, in accord with what are known as the latest Basel norms.
  • While finding capital in a savings-oriented nation may not be much of an issue if the right kind of policy changes are made, the challenge for Indian banks would be to tighten internal controls and risk management measures.

Importance of effective internal audit:

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  • The Bank for International Settlements has been consistent in its emphasis on the need for strong internal audit functions, as part of risk mitigation measures.
  • As early as in 2011, in a comprehensive charter, the BIS stated that an independent, effective internal audit function is part of sound corporate governance.
  • Banking supervisors must be satisfied as to the effectiveness of a bank’s internal audit function and that management takes appropriate corrective action in response to internal control weaknesses identified by internal auditors.
  • An effective internal audit function helps reduce the risk of loss and reputational damage to the bank.
  • A dynamic and vibrant internal audit department would now be the sine qua non for the functioning of any commercial bank worth its name.

Internal audit mechanism in Indian banks:

  • A major part of the ills currently plaguing the public sector banks could be traced to weak internal controls and the relatively lower importance given to audit and inspection as a “function”.
  • It is common knowledge among senior bankers that, as a rule, the inspection department is seen mostly as a “dump yard” for personnel who would not otherwise fit into other fashionable areas like treasury, credit or operations.
  • In promotion exercises, a tenure in Inspection is often seen as a disadvantage because the tag would be that of somebody who had been a misfit in “mainstream” banking.

Importance of autonomy in auditing:

  • Absolute independence of internal audit with accountability only to the board of directors is essential to put in place an effective audit mechanism.
  • To be truly detached and objective, even physically, the audit department needs to be away from the corporate/head office, because the Chairman or CEO, breathing down the neck of the inspection chief, may lead to compromising of roles.
  • In almost all public sector banks, the Inspection department head still functions under the direction and supervision of the CEO or the executive heads, leading to conflict of interest.
  • And in many review discussions, business performance predominates, pushing compliance and risk management to the background.
[Ref: Business Line]

 

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