CAG suggests robust control, oversight mechanism for monitoring SBS activities

GANGTOK,: The Comptroller & Auditor General of India (CAG) has recommended the State government to establish a robust control and oversight mechanism for monitoring the activities of State Bank of Sikkim (SBS).

Governance structures within the SBS have left much to be desired, and the bank has not been able to keep pace with the transformations in the banking sector within the country and globally, said the CAG in its report for the year ended March 2023.

The CAG had undertaken a performance audit of the SBS functioning, covering the period from 2017-18 to 2022-23. The State undertaking does not come under the regulatory purview of RBI and is still regulated by the provisions of the SBS Proclamation of 1968.

In its report, the audit body recommended that State government to put in place an effective regulatory oversight to ensure better financial discipline, reduce NPAs (currently 52.23 per cent) and safeguard the stability of the banking system. This recommendation is important considering that SBS is not a bank licensed under BR Act, it does not have a ‘lender of the last resort’.

As a banker to the banks in India, RBI also acts as the ‘lender of the last resort’ as it bails out the banks in distress from possible temporary liquidity crisis and the banking system from a possible breakdown.

“Since SBS is not a bank licensed under the BR Act, it does not have a lender of the last resort. Also, as per section 4 (3) of the Proclamation, the liability of the shareholders shall be limited to the amount, if any unpaid on the shares held by them. Audit opines that, in the context of an alarming rate of non-performing assets in SBS (currently 52.23 per cent), in the untoward event of a “Bank Run” occurring, there is no lender of the last resort to bail out SBS from insolvency as Government of Sikkim has a limited liability to the extent of its shareholdings which stood at Rs. 53 lakh,” said the CAG in its report.

The SBS did not provide a relevant reply, added the audit body.

A bank run is when the customers of a bank or other financial institutions withdraw their deposits at the same time over fears about the bank’s solvency. As more people withdraw their funds, the probability of default increases, which in turn, can cause more people to withdraw their deposits.

The CAG further recommended to the SBS to formulate and implement critical policies such as compliance policy, anti-fraud policy, whistle blower policy, credit policy, investment policy, etc. This was recommended considering the growing complexities in functioning of the banking sector and the best practices adopted by the other banks in the country.

In its reply, the SBS informed that CAG (January 2024) that all policies will be reviewed comprehensively and policies will be framed by hiring professional experts within six months.

The audit also recommended the SBS to establish governance committees like audit committee and fraud monitoring committee to oversee key areas for transparent functioning of the bank.

The State government may establish robust control and oversight mechanism for monitoring the activities of SBS, recommended the CAG. It highlighted that as per Section 31 A of Proclamation, the State government had a supervisory role for monitoring the activities of SBS and to provide necessary guidance on issues of significance to develop and establish a robust ‘control and oversight system’. However, audit observed that the same was not carried out by the Finance department.

Audit further noticed that as per the Section 31 (1) of Proclamation, the Sikkim government may request RBI to cause an inspection to be made, by one or more of its officers, of SBS and its books and accounts. However, since 1968, the State government has not made any such request. 

Thus, the State government not only was unable in monitoring the activities of SBS but did not provide necessary guidance for establishment of a robust control and oversight system also, said the CAG.

“In the exit meeting, the Chief Secretary stated (January 2024) that SBS does not fall under any administrative department and Finance Department would be proposed as an administrative department for which “Allocation of Business” rule needs amendment. The reply however confirms the audit contention that the State Government did not fullfill the role assigned to it under the Proclamation,” said the CAG in its report for the year ended March 2023.

In the absence of a lender of the last resort or an external regulator coupled with lack of oversight from the State government, these issues pose grave concerns for the financial stability of the bank as well as the customer confidence, the CAG concluded in its report.