JB Nagar Study Circle
08-09-2013
CA Bhavesh Vora
1
Coverage
 Introduction
 Auditor’s Report (Reserve Bank) Directions, 2008
 Important audit points
 Other important areas of compliances
 Standards of Auditing
 Penalties under RBI Act, 1934
08-09-2013
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JB Nagar CPE Study Circle
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Introduction
 The auditor’s report directions are issued by Reserve
Bank as per powers conferred u/s 45MA of Reserve
Bank of India Act, 1934
 In the public interest
 In the interest of the depositors
 For the purpose of proper assessment of the books of
accounts
Auditor’s report (Reserve Bank) Directions,
1998 repealed
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Auditor’s Report Directions
 Applicability
 Separate Report to Board of Directors
 Deposit/Non-Deposit taking NBFCs
 Exception report to RBI
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Auditor’s Report
Applicability
The directions applies to Auditors of all registered and
Non-Registered (Deemed NBFCs) whether Deposit
Accepting or Non-Accepting.
Auditors to submit additional Report to the Board
of Directors
The auditor to make a separate report to the Board of
Directors of the NBFC (including deemed NBFCs) on the
matters specified in the directions.
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Auditor’s Report…Cont
Matters to be included in the auditor’s report
The auditor’s report shall include a statement on the
following matters, namely:
In the case of all Non-Banking Financial Companies
I. Whether the company is engaged in the business of NBFI
and whether it has obtained a Certificate of Registration
(CoR) from the Bank
(Since the clause specifically mentions about obtaining
Certificate of Registration, the clause is applicable to all
those companies fulfilling criteria of 50% Financial Assets
and 50% Income out of Financial Assets.)
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Auditor’s Report…Cont
II. Whether the company is entitled to continue to hold
CoR.
-Asset Income Pattern as on March 31 of the applicable
year
-Auditor to issue the certificate to the Company
III. Asset Finance Companies: Whether correctly classified.
Principal Business Criteria – 60% instead of 50%
IV. Whether NBFC-MFI (Micro Finance Institutions) has
been correctly classified
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Auditor’s Report…Cont
Points to be reported in case of NBFCs
holding/accepting Public Deposits
i. Quantum within Prescribed Limit?
ii. Excess deposits has been regularized?
iii. Acceptance of Public Deposit without Minimum
Investment Grade Credit Rating?
iv. Credit Rating obtained is in Force? Aggregate Deposits
are as per limits specified in the ratings?
v. NOF level Rs. 200 Lacs? if no, whether deposits are
frozen/brought down?
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Auditor’s Report…Cont
(vi) Default in repayment of principal or interest by the
NBFC?
(vii) Prudential Norms Compliances
• Income recognition,
• Accounting standards,
• Asset classification,
• Provisioning for bad and doubtful debts,
• Concentration of credit/investments, etc
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JB Nagar CPE Study Circle
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Auditor’s Report…Cont
(viii) Capital Adequacy Ratio – correctly determined in
returns filed? Whether CRAR is as per minimum
prescribed?
(ix) Liquid Assets Requirements – Maintenance and
communicating to regional office
(x) Return in NBS-1 filed within stipulated period?
(xi) Half yearly return on prudential norms
(xii) Compliance in relation to opening of new
branch/office to collect deposits/ closure/
appointment of agent
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JB Nagar CPE Study Circle
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Auditor’s Report…
Reporting in case of Non-banking financial
company NOT accepting public deposits
Apart from the enumerated aspects applicable for all
NBFCs - the auditor shall include a statement on the
following matters, namely:1.
2.
3.
Resolution for non-acceptance of Public Deposits
Accepted any deposits?
Compliance with Prudential Norms
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08-09-2013
Income recognition
Accounting standards
Asset classification and provisioning for bad and
doubtful debts
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JB Nagar CPE Study Circle
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Auditor’s Report…
In respect of Systemically Important Non-deposit
taking NBFCs
(a) CRAR as disclosed in NBS- 7 return, has been correctly arrived at
and whether such ratio is in compliance with the minimum CRAR
prescribed by the Bank;
(b) Furnished to the Bank the (NBS-7) within the stipulated period*
*Quarterly within 15 days of the end of the Quarter
In case of companies that has obtained advice from
RBI
Auditor’s statement on whether the company has obtained a specific
advice from RBI? Whether those conditions are complied?
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JB Nagar CPE Study Circle
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Auditor’s Report…
Clause 4. Reasons to be stated for unfavorable or
qualified statements
- Reason for unfavorable or qualified statement
- Unable to express any opinion on any of the items,
indicate such fact together with reasons thereof.
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Auditor’s Report…
Obligation of auditor to submit an exception
report to RBI
 Any statement is unfavorable or qualified, or in the
opinion of the auditor the company has not
complied with:
 (a) The Chapter IIIB of RBI Act, 1934
(b) The NBFC Acceptance of Public Deposits (RBI)
Directions, 1998; or
(c) NBF (Deposit Accepting or Holding) Companies
Prudential Norms (Reserve Bank) Directions, 2007; or
(d) NBF (Non- Deposit Accepting or Holding) Companies
Prudential Norms (Reserve Bank) Directions, 2007;
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Auditor’s Report…
Report to regional office - details of unfavorable or
qualified statements and about the non-compliance
in respect of the company.
 Matters to be included in letter to RBI
 Board report and the letter to RBI should be in
sync
 Discussion with the client
 Letter received by auditors directly from RBI
 Proposed Remedial Measures
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Important Audit Points
 Investment Accounting
 NPA Accounting and provisioning
 Capital Adequacy
 Income Recognition
 Asset Size
 Asset Income Pattern
 KYC Compliances
 PMLA Compliances
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Provisioning Norms
 Standard Assets
 0.25% of standard assets (Notification dated 17th January, 2011)
 Sub standard assets
 Non
performing assets for a period of 18 months.
Renegotiated loans upto one year of satisfactory performance
of new terms.
 Provide 10% on the outstanding amount
 No specific provisions regarding Security
 Doubtful Assets
 Remains sub standard asset for period of 18 months and
above
 Provide 100% of uncovered outstanding amount
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Provisioning Norms
 To the extent of unsecured loan which is covered by value of
realizable securities, the provisioning required based on the
period the asset has remained doubtful
i. upto one year - 20%, ii. one to three year - 30%, iii. more than
three years - 50%
 Loss Assets
 Identified by the Company, its Auditors or RBI (Period is not
specified) or
 Potential threat of Non Recoverability due to erosion in the value
of securities or non availability of security or any fraudulent act
or omission on the part of the borrower
 100% Write off in the books
(Same treatment for the Interest)
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Other Important Norms
 Investment policy to be framed for classification of
investments into long term and short term
 Board of Directors to Frame policy for granting
call/demand loans and implement the same
 Framing of Fair practice code as per guidelines given in
circular
 Interest rate policy
 Asset classification into Standard, Sub standard,
Doubtful and loss assets and provisioning
requirements on these assets
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JB Nagar CPE Study Circle
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Other Important Prudential
Norms..
 Various disclosures should be made in the Balance
sheet
 Formation of audit committee
 Schedule to be appended to the balance sheet
 Submission of statutory auditor’s certificate
 Cannot give loan against own shares
 Communicate within 30 days important changes as
prescribed
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JB Nagar CPE Study Circle
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Standards on Auditing
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All standards on auditing are applicable. However, following
standards requires special attention
SA 240 – Auditor’s responsibility relating to Fraud in an audit of
financial statements
SA 250 – Consideration of Laws and Regulations in an Audit of
Financial Statements
SA 265 – Communicating deficiencies in Internal Controls to
those charged with Governance
SA 610 – Using the work of Internal Auditors
SA 620 – Using the work of an Auditor’s Expert
08-09-2013
CA Bhavesh Vora
JB Nagar CPE Study Circle
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Penalty
Deposit Reporting
 NBFC ought to file statements relating to Deposits accepted. If not filed, then
auditor should make a report to RBI giving the aggregate amount of such
deposits by the NBFI. (Section 45MA (1))
RBI Directions to Auditors
 RBI direction to NBFC/Auditors of such NBFC in relation to books of accounts,
balance sheet, profit and loss accounts, disclosures of liabilities in the books of
accounts or any matters relating thereto for the purpose of proper assessment
of the books of accounts. ((Section 45MA (1A))
Report U/s 227 of Companies Act, 1956
 Report under section 227(2) of companies act, 1956 should include the contents
of report made under section 45MA(1A) about deposits held by the NBFC. (Sec
45MA(2))
Penalty : Rs. 5000/- for contravening the directions given u/s 45MA (Section
58B (4AA))
08-09-2013
CA Bhavesh Vora
JB Nagar CPE Study Circle
22
JB Nagar Study Circle
08-09-2013
CA Bhavesh Vora
23