NBFC

AUDIT OF NON-BANKING FINANCIAL COMPANY

A. BACK DROP

1 DEFINITION
Section 45 I(f) of Reserve Bank of India (Amendment) Act, 1997 defines a Non-Banking
Financial Company as:
1) A financial institution which is a company;
2) A non banking institution which is a company with principal business of receiving
of deposits, under any scheme or arrangement or in any other manner, or lending in
any manner;
3) Such other non-banking institution or class of such institutions, as the Reserve Bank
with the previous approval of the Central Government may specify by notification in
the Official Gazette.

DEEMED NBFC
Further, financial activity as principal business also happens when (as per last audited
balance sheet)

(A) (B)
A company’s financial assets Income from financial assets constitute
constitute more than 50 % of more than 50 % of the gross income. A
the total assets (netted off by company which fulfils both these crite-
intangible assets) and ria shall qualify as an NBFC and would
require to be registered as NBFC by RBI.

(Popularly Known as 50-50 test)

2 Registration and Regulation of NBFC

NOF
Under section 45-IA of the RBI (Amendment) Act, 1997, no Non-Banking
Financial Company(NBFC) is allowed to commence or carry on the business of a
Non-Banking Financial Institution without :
• Obtaining a certificate of registration issued by the RBI.
• Having a net owned fund (NOF) of ` 25 lakhs ( ` 2 crore since April 1999). Present
limit is ` 10 Crores.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 1

 NBFC
• RBI can specify different, ever higher limits for NOF for different category of
NBFC.
• Existing NBFC except NBFC - P2P, AA and with no public funds and no customer
interface, NOF to be increased to 10 Crores by 31 March 2027,

How to apply?

A company can apply to the RBI in prescribed from along with necessary docu-
ments for registration. The RBI issues Certificate of Registration after satisfying
itself that the conditions in Section 45-IA of the RBI Act, 1934 are satisfied.

RBI Directions

The Reserve Bank of India has issued directions on:

1. Acceptance of public deposits
2. Prudential norms like capital adequacy, income recognition, asset classification,
provision for bad and doubtful debts
3. Risk exposure norms and
4. Other measures to monitor the financial solvency and reporting by NBFCs.
5. Directions were also issued to auditors to report non-comliance with the RBI Act
and the Regulations to the RBI, Board of Directors and shareholders.
6. RBI has also issued Fair Practices Code to be adopted by all NBFCs while doing
lending business. The guidelines inter alia, covered general principles on adequate
disclosures and also adopting a non-coercive recovery method.

Types of NBFC
As per section 45-1 (f) and (c) : Includes

A company engaged in the business of loans Company that has principle

and advances, acquisition of shares/stocks/ business of receiving deposits
bonds/debentures/securities/leasing/hire- under any scheme or ar-
purchase/insurance business/chit business rangement in one lump sum
but does not include any institution whose or in installments by way
principle business is that of agriculture activ- of contributions or in any
ity, industrial activity, purchase or sale of any other manner, is also a non-
goods (other than serious) or providing any banking financial company
services and sale/purchase/construction of (Residuary non-banking
immovable property. company).

2 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 NBFC
3. Types of NBFCs- Compliance and Regulatory Perspective:
A. CLASSIFICATION OF NBFC’S REGISTERED WITH RBI
NBFCs mandated to register under RBI categorized as follows:
a) Deposit Acceptance :- In terms deposit acceptance or otherwise into Deposit
and Non-Deposit accepting NBFCs;
b) Non deposit taking NBFCs by their Size :- into systemically important and
non-systemically important (NBFC-NDSI and NBFC-ND); and
c) By the Kind of Activities
The different types of NBFCs are as follows: by the kind of activity they conduct
(i) Investment and Credit Company (ICC)
(ii) Infrastructure Finance Company (IFC)
(iii) Systematically Important Core Investment Company (CIC-ND-SI)
(iv) Infrastructure Debt Fund Non- BankingFinancial Company (IDF-NBFC)
(v) NBFC-MicroFinance Institution (NBFC-MFI)
(vi) NBFC Factors (NBFC Factors)
(vi) NBFC- Non Operative Financial Holding Company (NOFHC)
(vii) Asset Finance Company, Investment Company, Loan Company, Mortgage
Guarantee Companies, etc.

B. NBFC’S EXEMPTED FROM REGISTRATION WITH RBI

Following NBFCs since regulated by other Regulators have been exempted

from the requirement of registration under Section 45 -IA of the RBI Act, 1934
subject to certain conditions.

Housing Finance Merchant Bank- Stock Stock-broking/sub- Venture Capital

Institutions ing Companies Exchanges broking companies Fund Companies

Nidhi Insurance Chit Micro Finance Securitisation and

Companies companies ; and Companies Companies Reconstruction Companies

Mutual Benefit Core Investment Alternative Investment

Companies Companies Fund (AIF) Companies

Note: - Core Investment Companies with asset size of less than Rs. 100 crore, and
those with asset size of Rs. 100 crore and above but not accessing public funds
are exempted from registration with the RBI.

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 NBFC
C. CLASSIFICATION OF NBFC AS PER SCALE BASED REGULATION (SBR)
A Revised Regulatory Framework for NBFCs on 22 October 2021, effective from
01 October 2022, RBI has revised different facets of existing NBFC Classifica-
tion and regulation like Capital Requirements, Governance Standards, Prudential
Regulations, etc. based on four layers that are defined based on their size, activ-
ity, and perceived riskiness.
These four layers are:

NBFC – Top
Layer (NBFC-TL)
NBFC- Upper Layer
(NBFC-UL)

NBFC- Middle Layer (NBFC-ML)

NBFC – Base Layer (NBFC-BL)

Base Layer
It comprise of:
(a) Non-deposit taking NBFCs below the asset size of ₹1000 crore; and
(b) NBFCs undertaking the following activities-
(i) NBFC-Peer to Peer Lending Platform (NBFCP2P),
(ii) NBFC-Account Aggregator (NBFC-AA),
(iii) Non-Operative Financial Holding Company (NOFHC); and
(iv) NBFCs not availing public funds and not having any customer interface.

Middle Layer
It consist of:
(a) all deposit taking NBFCs (NBFC-Ds), irrespective of asset size,
(b) non-deposit taking NBFCs with asset size of ₹1000 crore and above; and
(c) NBFCs undertaking the following activities
(i) Standalone Primary Dealers (SPDs),
(ii) Infrastructure Debt Fund - Non-Banking Financial Companies (IDF-NBFCs),
(iii) Core Investment Companies (CICs),
(iv) Housing Finance Companies (HFCs); and
(v) Infrastructure Finance Companies (NBFC-IFCs).

4 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 NBFC
Upper Layer
It comprise of those NBFCs which are specifically identified by the Reserve Bank
as warranting enhanced regulatory requirement based on a set of parameters and
scoring methodology as provided.
The top ten eligible NBFCs in terms of their asset size shall always reside in the
up per layer, irrespective of any other factor.

Top Layer
The Top Layer will ideally remain empty. This layer can get populated if the Re-
serve Bank is of the opinion that there is a substantial increase in the potential
systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall move to
the Top Layer from the Upper Layer.

Categorisation of NBFCs carrying out specific activity

As the regulatory structure envisages scale based as well as activity-based

regulation, the following prescriptions shall apply in respect of the NBFCs.
NBFC-P2P, NBFC-AA, NBFC-D, SPD and Investment and Credit Companies Govern-
NOFHC and NBFCs CIC, IFC (NBFC-ICC), Micro Finance ment
IDF-
without public funds and and HFC Institution (NBFC-MFI), NBFC- owned
customer interface NBFC Factors and Mortgage Guarantee NBFCs
Companies (NBFC-MGC)

Base Layer Middle Middle any of the layers depending on Base

Layer or Layer the parameters of the Layer or
Upper scale based regulatory framework. Middle
Layer Layer

From 01-10-2022

Refer

NBFC-ND NBFC-NDSI NBFC-D & NBFC-

Asset size NDSI-others
as (> 500 Crore & < 1000 (others means >
Crore)
NBFC-BL 1000 Crore)
as
as
BL unless featured in
ML NBFC-ML or UL

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 5

 NBFC
Q. ABC Ltd. is a company registered under the Companies Act, 2013. The company is
engaged in the business of loans and advances, acquisition of shares / stocks / bonds /
debentures / securities issued by Government or local authorities. For the year ended 31st
March, 2021 following are some extracts from the financial statements:
(i) Paid-up share capital ` 40.53 Cr.
(ii) Non-Current Assets - Loans & Advances ` 55.90 Cr.
(iii) Current Assets - Loans and advances ` 344.47 Cr.
(iv) Total assets of the company ` 530 Cr.
(v) Intangible assets ` 3 Cr.
(vi) Profit for the Year ` 7.25 Cr.
(vii) Income from interest and dividends ` 52 Cr.
(viii Gross income ` 102.57 Cr.
Directors do not intend to apply for registration as Non-Banking Financial Company
(NBFC) under Section 45-IA of the Reserve Bank of India (Amendment) Act, 1997. Ad-
vise. (Dec-21-New) Hint: Apply 50:50 Test. Financial Asset = 55.90 + 344.47 >50% and
530-3
Income from Financial Assets = 52 >50% hence deemed NBFC.
102.57

B. Difference between Bank and NBFC: -

(i) (ii) (iii) (iv)

NBFC NBFC do Deposit
not form insurance No Mini-
cannot
part of the facility of mum
accept
payment and DICGC is not Exposure to
demand
settlement available to Priority Sec-
deposits.
system and depositors of tor required
however some
cannot issue NBFC’s unlike by NBFCs.
NBFCs can ac-
cept Term De- cheques drawn in case of banks.
posits; on itself

C. Prudential Norms
1. CAPITAL REQUIREMENTS (NBFC-D, NBFC-ND-SI)
Every applicable NBFC as defined in the Master Direction- Non-Banking Financial
Company –Systemically Important Non-Deposit Taking Company & Deposit Taking
Company (Reserve Bank) Directions, 2016 shall maintain a Minimum Capital Ratio
consisting of Tier-I and Tier-II capital which shall not be less than 15% of its ag-
gregate risk weighted assets on balance sheet and of risk adjusted value of

6 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 NBFC
off-balance sheet items. The Tier-I capital (other than NBFC-MFI and IDF-NBFC),
at any point of time shall not be less than 10% by March 31, 2017. Applicable
NBFC primarily engaged in lending against gold jewellery (such loan comprising
50% or more of their (Financial Assets) shall maintain a minimum Tier-I capital
of 12%.
However, in the case of Non-Systemically Important Non-Deposit Taking Com-
pany (Reserve Bank) Directions, 2016, Net Owned Fund requirements have to be
complied.
Explanations: In these Directions, degrees of credit risk expressed as percentage
weightages have been assigned to balance sheet assets. For example, percentage
weights assigned to Fixed Assets is 100, Cash & Bank Balances is 0, etc. The risk
weighted asset shall be calculated as the weighted aggregate of funded items as
detailed hereunder:
S.N. WEIGHTED RISK ASSET ON BALANCE SHEET ITEMS % WEIGHT
1. Cash and bank balances including fixed deposits and certificates of deposits with banks. 0
2. Investments:
a. Approved securities (except c below) 0
b. Bonds of public sector banks. 20
c. FD/ certificates of deposits/bonds of PFI. 100
d. Shares of all companies and debentures/bonds/commercia papers of all companies and 100
units of all M.F.
e. All assets covering PPP and post commercial operations date (COD) infrastructure projects in 50
existence over a year of commercial operation
3. Current Assets:
a. Stock on hire (NBV) 100
b. Inter corporate loans/deposits 100
c. Loans& Advances fully secured against deposits held 0
d. Loans to staff 0
e. Other secured loans and advances considered good (except at 6 below) 100
f. Bills purchased/discounted. 100
g. Others (to be specified) 100
4. Fixed Assets (net of depreciation):
a. Assets leased out (net book value) 100
b. Premises. 100
c. Furniture & fixture. 100
5. Other Assets:
a. Income tax deducted at source (net of provision) 0
b. Advance Tax paid (net of provision) 0
c. Interest due on Govt. Securities 0
d. Others (to be specified) 100

6. Domestic Sovereign:
(a) Fund based claims on the Central Government 0
(b) Direct loan / credit / overdraft exposure and investment in State Government securities 0
(c) Central Government guaranteed claims
(d) State Government guaranteed claims, which have not remained in default / which are in 0
default for a period not more than 90 days 20
(e) State Government guaranteed claims, which have remained in default for a period of
more than 90 days. 100

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 7

 NBFC
2. INCOME RECOGNITION
 The income recognition shall be based on recognized accounting principles.
 Income including interest/discount/hire charges/lease rentals or any other charges
on NPA shall be recognized only when it is actually realized.
 Any such income recognized before the asset became non-performing and remain-
ing unrealized shall be reversed.

3. ASSET CLASSIFICATION AND PROVISIONING REQUIREMENTS (EXCEPT NBFC-MFI’S)

NPA
a. Overdue > 3 Months (in case of NBFC-ND: 6 months except 12 months in case of
lease), overdue considered of;
1. Term loan instalment
2. Demand or call loan, from the date of demand or call or on which interest
amount remained overdue
3. Bill overdue
4. Interest in respect of a debt or the income on receivables under the head
‘other current assets’ in the nature of short term loans/advances, which facility
remained overdue
5. Dues on account of sale of assets or services rendered remitted
6. Lease rental and hire purchase instalment,
b. If one facility of borrower classified as NPA, all credit facilities classified as NPA,
except for Lease & Hire Purchase (HP) transaction where each account evaluated
separately.
c. NPA not upgraded if regularised due to rescheduling/restructuring unless it has dem-
onstrated satisfactory performance for 1 year.

STANDARD ASSET

Asset in respect of which, no default in repayment of principal/interest is perceived

and which does not disclose any problem or carry more than normal risk attached
to the business.
Provision:
0.40% of the outstanding amount- for NBFC - ND - SI and NBFC - D
0.25% of the outstanding amount- for NBFC - ND
Not netted off from gross advance: But shown as ‘Contingent Provisions against

8 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 NBFC
standard Asset’ in BS

SUB-STANDARD ASSET
a. Asset classified as NPA for a period not exceeding:

NBFC-D and
NBFC-ND (18 NBFC-ND-SI (12
months) months)

b. Asset where the terms of the agreement regarding interest and/or principal have
been re-negotiated or rescheduled or restructured after commencement of opera-
tions, until the expiry of one year of satisfactory performance under the renegoti-
ated or rescheduled or restructured terms.
Provision:
A general provision of 10% of total outstanding shall be made.

DOUBTFUL ASSET

Asset which remains a sub-standard for a period exceeding -

For For NBFC-

NBFC-ND ND-SI and
(18 months) NBFC-D (12
months)

Secured Portion Provision:

Period for which the asset has been con- % of provision

sidered as doubtful
• Upto 1 year 20
• 1 to 3 years
30
• More than 3 years 50

Unsecured Portion Provision:

100% provision to the extent to which the advance is not covered by the realisable
value of the security.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 9

 NBFC
LOSS ASSET

a. Asset identified as loss asset by the applicable NBFC or by internal or external

auditor or by the Bank.
b. Asset which is adversely affected by the potential threat of non-recoverability
due to either erosion in value of security/non-availability of security or fraudulent
act or omission by borrower.
Provision:
100% of the outstanding amount take written off or provided for.
Above guidelines to be amended in phased manner after introduction of SBR for
NBFC.

D. AUDIT PROCEDURES
1. Ascertaining the business of the company

a. Scan through MOA/AOA of the company. Assess principal business activities.

b. Scan through the minutes of the Board / Committee meetings and hold discussion
with the top-level management to ascertain the corporate business plan / strategy.
c. Based on the classification of the company into a Loan company / Investment
company it will be accordingly required to comply with the provisions relating to the
limits on acceptance of public deposits as contained in the NBFC public deposit direction.

2. Evaluation of Internal Control system

a. An auditor should gain an understanding of the accounting system and related internal
controls adopted by the NBFC to determine the Nature, Timing, and Extent (NTE) of his
audit procedures. Assess whether ICs are adequate and are being effectively followed, and
b. He should ascertain whether the NBFC has effective system of periodical review of
advances in place, monitoring recoveries to manage sticky advances at early stage
and present NPAs.

3. Registration with RBI & NOF

a. Section 45-IA of RBI Act, has made it incumbent on the part of all NBFCs to
comply with registration requirements and have minimum net owned fund of
` 10 crore.
b. An auditor should obtain a copy of the certificate of registration granted by the
RBI or in case the certificate of registration has not been granted, a copy of the

10 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 NBFC
application form filled with the RBI for registration. No business can be com-
menced before obtaining registration certificate.

Investments in Liquid Assets -

a. Every NBFC holding public deposits is required to invest a specified percentage in
liquid assets and report on quarterly basis.
b. This quarterly return (duly signed by an officer of the NBFC) is required to be
submitted quarterly and with reference to investments held in approved securities
during the relevant quarter. The auditor should ascertain compliance with main-
taning investments and timely filing of returns.

4. NBFC Public deposit directions

a. The auditor must ascertain RBI’s classification of NBFC. If not provided ascertain the
classification with application filed, financial results & MOA of NBFC.
b. Thereafter, it must be ascertained whether the company has complied with the aspects
in relation to the activity of mobilization of public deposits, as per provision applicable.
c. Aspects in relation to the activity of mobilization of public deposits
I. The ceiling on the quantum of public deposits has been linked to its Credit
Rating as given by an approved credit rating agency.
Auditor to:-
1. Obtain a copy of credit rating assigned to NBFC and check whether the pub-
lic deposits accepted/held are in accordancewith the it.
2. In the event of a upgrading/downgrading of credit rating NBFC will have to
increase/reduce its public deposits within a specified time frame and inform
the same to the RBI in writing.
3. In the event of downgrading of credit rating below the minimum specified in-
vestment grade, NBFC-ICC or Factor shall regularise the excess deposit as pro
vided here under;
(a) Stop accepting fresh public deposits and renewing existing deposits;
(b) all existing deposits shall run off to maturity; and
(c) report the position within 15 working days, to the Regional Office of
RBI where the NBFC is registered.
(d) Provided no matured public shall be renewed without the express and
voluntary consent of the depositor.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 11

 NBFC
II. Test check Interest Calculations in respect of public deposits mobilized by
NBFC to ascertain that the NBFC has not paid interest in excess as per spec-
ifications.
III. Test check the Brokerage Calculation with the bills & vouchers for require-
ment of out of pocket expenses, and verify whether no spends in excess of
specifications.
IV. Ascertain whether the NBFC has accepted or renewed any Public Deposit only
after a written application from the depositor in form to be supplied by company
form to certain category SH, director, etc.
V. Verify the Deposit Register maintained by a NBFC and test check the particulars
that have been entered there in respect of each depositor with supporting receipt
issued to him.
VI. Check whether the NBFC is regularly paying its deposits on due date and in the
case of a delay / default, the reasons for the delay / default and the actual date of
payment.
VII. Check whether the investments made in approved liquid asset by NBFC
holding public deposits have been lodged in safe custody with a designated Sched-
uled Commercial Bank and certificate of it obtained from RBI.
VIII. Check whether the NBFC has filled its returns periodically. As specified.
IX. Check whether Board resolution has been passed by NBFC to effect that it has neither
accepted/nor would it accept any public deposit during the year.
X. In the case of Group Holding Investment Companies, check whether the NBFC has passed a
board resolution to the effect that the company has invested or would invest hold its invest-
ment in share & securities of group companies specifying names of the companies. Group
holding investment companies are required to give a further undertaking that it would
neither trade in such shares & securities of group companies nor would it accept any
public deposits during the year.

5. NBFC Prudential Norms Directions

a. Check compliance with prudential norms encompassing income recognition, income
from investments, accounting standards, accounting for investments asset clas-
sification, provisioning for bad debts and doubtful debts, capital adequacy norms,
prohibitions on granting of loans by NBFC against its own shares, prohibitions on

12 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 NBFC
loans and investments for failure to repay public deposits and norms for concentra-
tion of credit / investments.
b. Ensure that the BOD of every NBFC granting intending to grant demand / call loans
shall frame a policy for the company and shall implement too.
c. Verify that advances and other credit facilities have been properly classified as
standard sub-standard/doubtful/loss and that proper provision had been made in
accordance with directions.
d. In respect of NPA, auditor should check whether unrealised income has not been
taken in P&L account on accrual basis (income from NPA to be accounted on reali-
sation basis only).
e. If last year’s NPA is not classified as NPA in current year, the auditor to examine
whether the account has become regular and the same can be treated as perform-
ing as per directions.

E. Classification of Frauds by NBFC

Classified as under based mainly on the provisions of the Indian Penal Code –
a Misappropriation and criminal breach of trust.
b Fraudulent encashment though forged instruments manipulation of BOA or through
fictitious accounts and conversion of property.
c Unauthorised credit facilities extended for reward or for illegal gratification.
d Negligence and cash shortages.
e Cheating & forgery.
f Irregularities in Forex transactions.
g Any other type of fraud not covered under specified heads above.
Such as cases of negligence and cash shortages and irregularities in forex transac-
tions to be reported as fraud if intention to cheat / defraud is suspected proved.
Except these will be treated as fraud without considering the intention -
I. Cases of cash shortages > ` 10,000/- and
II. Cases of cash shortages > ` 5,000/- where detected by auditor/management/
inspecting officer and not reported by the person handling cash.

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 NBFC
F. CHECK LIST (ADDITIONAL POINTS TO BE COVERED IN AUDIT OF NBFC)
1. Investment Credit Company (ICC)

I. Concept of ICC

In order to provide NBFCs greater operational flexibility

RBI

Merged three categories of NBFCs

Asset finance Loan Investment

companies (AFC) companies (LC) companies (IC)

Into a new category called – NBFC Investment

Leasing cos. credit company (NBFC – ICC)
HP cos.
Based on the principle of
regulation by activity rather than regulation by entity.

11. Audit Checklist - ICC ( Illustrative) I Investment Related

1. Board Minutes I L Loans Related
Verify :- Board minutes for purchase & sale of investments
Ascertain:- From board resolution or obtain MGT certificate for investment whether
current or long term

2. Bills / Contract Notes I

Test check bills / contract notes received from broker with reference to the prices
vs. the stock market quotations on the respective dates.

3. NBFC Prudential Norms Directions I

Check:- Whether Investment have been valued in accordance with NBFC – Pru-
dential Norms; and Provision:- for fall in market value of securities (wherever ap-
plies) has been made.

4. AS-13/Ind-AS I

Ensure that requirements of AS-13 / Ind AS have been complied with by NBFC, to
extent not inconsistent with Directions

14 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 NBFC
5. Income Recognition I L

Cash Basis
(i) Dividend income (or accrual basis if declared by co. & right to receive is established)
(ii) Income from MF
(iii) Income from NPAs
Accrual basis
Income from bond/debenture of corporate bodies (if debenture interest is serviced
regularly as per determined rates)

6. Physical Verification I

Verify :– All shares and securities held by NBFC

Verify certificate :- Where security is logged with an institution or bank

7. Depository I

In respect of shares/securities held through a depository, obtain a confirmation

from the depository intermediary regarding the shares/securities held by it on
behalf of the NBFC.

8. Unquoted Bond I

Ensure that investments in unquoted debentures/bonds are treated as term loans/

credit facilities, for the purpose of income recognition & asset classification.

9. Subsidiary/Group Company I

In respect of investments made in subsidiary/group company during the year as-

certain the basis for arriving at the price paid for acquisition of such shares and
whether the valuable is as per Prudential Norms.

10. Securities lending scheme I

 Ensure securities of the same type / class are received back by the lender, paid by
the borrower at the end of specified period.
 Verify confirmation from intermediary regarding securities deposited / borrowed.

11. Controls L

Verify whether NBFC has an adequate system of proper appraisal & follow up of loans

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 15

 NBFC
and advances. Study the trend of NPA recovery performance to ensure that the NBFC
doesn’t have undulyhigh level of NPAs.

12. Sanctions L

Auditor should examine whether each loan or advance has been properly sanctioned.
Verify the conditions attached to the sanction i.e. limit on borrowings, nature of
security, interest, terms of repayment, etc.

13. Security L

Auditor should verify the security obtained nature and value of security and the net
worth of the borrow/guarantor to determine the extent to which an advance could
be considered realisable.

14. Confirmation of Balances L

Examine the confirmation of balances as certified by borrowers, and review the rec-
onciliation statements, if any.

15. Prudential Norms L

Ensure compliance with RBI directions in classification of loans and advances.

16. Advance against Own Shares L
Verify whether NBFC has not advanced any loans against the security of its own
shares. I
9
17. Bill Discounting L

Ensure that proper records have been maintained for every bill discounted/redis-
count. Test check transactions with reference to the documents maintained to
ascertain accounting of discounting charges.

18. Ceiling on Loan/Investments I/L

Ensure that the NBFC has not lent/invested in excess of the specified limits to any
single borrower/group of borrowers as per RBI directions.
] Single Co.
Single Co.
Group Co.
15% (Investment or loan)
25% (Investment & loan)
40% (Investment & loan)
] of Total Assets

16 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 NBFC
G. Auditors Duty:
1 AUDITORS DUTY TO REPORT:
The auditor under section 143 of Companies Act, 2013 will report to members and
the auditor shall also make a separate report to the Board of Directors of the com-
pany, and to RBI on exception basis.
Sec.45MA of RBI Act requires auditor of deposit accepting NBFC whether returns
deposits are submitted to RBI. If not auditor to funish to RBI aggregate amount of
deposits held and also include it in report u/s 143 if CA, 2013.

2 MATTERS TO BE INCLUDED IN THE AUDITOR’S REPORT TO THE BOD:

A) IN CASE OF ALL NBFC’S :-
i) Whether the company is engaged in the business of Non-Banking Financial Insti-
tution as per the Principal Business Criteria (50-50 Test). Whether it has obtained
a certificate of registration from the Bank.
ii) Whether such company is entitled to continue to hold certificate of registration in
terms of its asset/ income as on March 31st of the applicable year
iii) Whether it meets the NOF requirements
iv) Every NBFC shall submit a certificate from its statutory auditors, that it is engaged
in the business of NBFC and holding registration certificate, within 1 month from
the date of finalisation of B/S, and in any case not later than Dec. 30th of that
year

B) IN CASE THE NBFC ACCEPTING / HOLDING PUBLIC DEPOSITS: ADDITIONALLY INCLUDE:-

DEPOSITS

(i) (ii) (iii)

Whether the (iv)
Excess of deposits Whether the com-
a) public deposits accepted by Whether any
held above limits pany has defaulted
the company together with violations of
prescribed, whether in paying to its de-
b) Other borrowings like from restrictions on
are regularized in positors the interest
1. its SH in case of public acceptance of
the manner provided and / or principal
limited NBFC, deposits.
in NBFC Acceptance amount of the
2. From public by unsecured of Deposits (Reserve deposits after they
3. Nonconvertible bonds, Bank) Directions, become due.
and entities excluded 2016.
from definition of public
deposits are within lim-
its,

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 17

 NBFC

CAR/CRAR
V) Whether NBFC Vi) Further: Vii) Whether CAR as
accepting public  Whether the credit rat- disclosed in the return
deposits without ing for each fixed deposit submitted to the
minimum invest- Scheme is in force. bank has been cor-
ment grade credit  Whether the aggregate rectly determined and
rating. amount of whether such ratio is
deposit outstanding as at in compliance with the
any point minimum CRAR pre-
during the year has ex-
scribed (applies also
ceeded the limit
on NBFC-ND-SI)
specified.

PRUDENTIAL NORMS & RETURNS

Viii)Whether the company has iX) Whether the com- X) Whether the
complied with the prudential pany has furnished company has
norms on - to RBI within stipu- furnished to the
a. Income Recognition. lated period in NBS 1 bank within the
b. Accounting standards. return of deposits. stipulated period
c. Asset classification. quarterly return on
d. Provisioning for bad & prudential norms
doubt ful debt. as specified.
e. Concentration of credit /
investments.

COMPLIANCE WITH REQUIREMENTS

Xi)Whether the company has complied Xii)Whether in the case of opening of new
with the liquid asset. requirement as branches or offices to collect depos-
prescribed by the bank in exercise of its or in the case of closure of exist-
powers u/s 45-IB of the RBI Act and ing branches / offices or in the case of
whether the details of the desig- appointment of agent, the company
nated bank in which the approved has complied with the requirements
securities are held is communicated contained in the NBFC Acceptance of
to the office concerned of the bank Public Deposits (Reserve Bank) Direc-
in NBS-3 tions, 2016.

C) IN CASE OF NBFC NOT ACCEPTING PUBLIC DEPOSITS: INCLUDE ADDITIONALLY IN REPORT:-

i) Whether the BOD has passed a resolution for non-acceptance of any deposits.
ii) Whether the company has accepted any public deposits during the relevant period.
iii) Whether the company has complied with prudential norms.

18 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 NBFC
iv) In respect of Systemically Important Non-Deposit taking NBFCs (ND-SI) and
NBFC-D:
a. Whether the CAR as disclosed in the return submitted to the bank has been
correctly arrived at and whether such ratio is in compliance with the mini-
mum CRAR prescribed by the bank (Form NBS-7)
b. Whether the company has furnished to the RBI the annual statement of
capital funds, risk assets / exposures and risk asset ratio within the stipu-
lated period.(Form NBS-7)
v) whether NBFC correctly classified as NBFC-MFI

D) IN CASE OF A COMPANY ENGAGED IN THE BUSINESS OF NON-BANKING FINANCIAL IN-

STITUTION NOT REQUIRED TO HOLD CERTIFICATE OF REGISTRATION SUBJECT TO CERTAIN
CONDITIONS :-
Where a company has obtained a specific advice from the bank that it is not
required to hold certificate of registration from the bank whether the company is
complying with the conditions stipulated as advised by bank.

Modified/Reporting
(i) Where, in the auditor’s report, the (ii) Where the auditor is
statement regarding any of the items unable to express any opinion
referred to matters specified above is on any of the items referred
unfavourable or qualified, the auditor’s above, his report shall indicate
report shall also state the reasons for such fact together with reasons
such unfavourable or thereof.
qualified statement, as the case may be.

H. Schedule-III (Division-III)
1. APPLICABILITY OF IND AS ON NBFC
As per Rule 4 (1)(iv) of the Companies (Indian Accounting Standards) Rules, 2015
and as amended by Companies (Indian Accounting Standards) (Amendment) Rules,
2016, NBFCs are required to comply with Indian Accounting Standards (Ind AS) as
under-

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 19

 NBFC
(i) Accounting periods beginning 1 April 2018: Listed and unlisted NBFCs having a net
worth of ` 500 crore or more and holding, subsidiary, joint venture or associate compa-
nies of such NBFCs;
(ii) Accounting periods beginning 1 April 2019: All other listed NBFCs, unlisted NBFCs hav-
ing a net worth of `250 crore or more but less than `500 crore and holding, subsidiary,
joint venture or associate companies of such NBFCs.
The net worth shall be calculated in accordance with the standalone FS of the NBFCs
as on 31st March 2016 or the first audited FS for accounting period which ends after
that date.

2. DIFFERENCES BETWEEN DIVISION II & III

(a) NBFCs allowed to present items of the BS in order of their liquidity. Companies
required to follow Division II are not allowed
(b) An NBFC is required to separately disclose by way of a note any item of ‘other
income’ or ‘other expenditure’ which exceeds 1 per cent of the total income. Divi-
sion II, on the other hand, requires disclosure for any item of income or expenditure
which exceeds 1 per cent of the revenue from operations or `10 lakhs, whichever is
higher.
(c) NBFCs are required to separately disclose under ‘receivables’, the debts due from
any LLP in which its director is a partner or member.
(d) NBFCs are also required to disclose items comprising ‘revenue from operations’ and
‘other comprehensive income’ on the face of the Statement of profit and loss in-
stead of as part of the notes.
(e) Separate disclosure of trade receivable which have significant increase in credit risk
& credit impaired
(f) The conditions or restrictions for distribution attached to statutory reserves have to
be separately disclose in the notes as stipulated by the relevant statute.

3. UPDATE - SCALE BASED REGULATION FOR NBFC:

RBI has now introduced a revised framework for “Scale Based Regulation (SBR) for
NBFCs” wherein RBI would categorise NBFCs in four layers based on their size, activity,
and perceived riskiness classified as NBFC-Top Layer (NBFC-TL), Upper Layer (NBFC-
UL), Middle Layer (NBFC-ML) and Base Layer (NBFC-BL). Accordingly various existing
provisions would change over time.

20 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 NBFC
I. Provision in CARO 2020 for NBFC auditors
1. CARO 2020-NBFC Related Provisions - Clause (XVi) of Paragraph 3 of CARO 2020
Auditor is required to report that “whether the company is required to be
registered u/s 45-IA of the Reserve Bank of India Act, 1934 and if so, whether the
registration has been obtained.”

2. Registration

(i) The auditor is required to examine whether the company is engaged in the
business which attract the requirements of the registration.
(ii) The registration is required where the financing activity is a principal business of
the company.
(iii) The RBI restrict companies from carrying on the business of a non-banking
financial institution without obtaining the certificate of registration.

3. Audit Procedure and Reporting

(i) The auditor should examine the transactions of the company with relation to
the activities covered under the RBI Act and directions related to the NonBanking
Financial Companies.
(ii) The financial statements should be examined to ascertain whether company’s
financial assets constitute more than 50 per cent of the total assets and income
from financial assets constitute more than 50 per cent of the gross income.
(iii) Whether the company has net owned funds as required for the registration as
NBFC.
(iv) Whether the company has obtained the registration as NBFC, if not, the reasons
should be sought from the management and documented.
(v) The auditor should report incorporating the following:-
1. Whether the registration is required under section 45-IA of the RBI Act,
1934.
2. If so, whether it has obtained the registration.
3. If the registration not obtained, reasons thereof.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 21

 NBFC

Format for preparation of financial st

Illustrative format of Balance Sheet under Division III of Schedule III Illustrative format of Balance She
PARTICULARS ASSETS Continue...
Notes CY PY Particular
(1) Financial Assets • Total outstanding dues of
(i) Cash and cash equivalents and small enterprises
(ii) Bank balance other than (a) above • Total outstanding dues of
(iii) Derivative financial instruments micro enterprises and sma
(iv) Receivables (iii) Debt securities
(1) Trade Receivables (iv) Borrowings (other than debt
(2) OtherReceivables (v) Deposits
(vi) Subordinated liabilities
(v) Loans
(vii) Other financial liabilities (to
(vi) Investments
(2) Non-Financial Liabilities
(vii) Other Financial assets
(a) Current tax liabilities (n
(2) Non-Financial Assets
(b) Provisions
(a) Inventories (c) Deferred tax liabilities (n
(b) Current tax assets (net) (d) Other non-financial liabi
(c) Deferred tax assets (net) (to be specified)
(d) Investment property (3) EQUITY
(e) Biological assets other than bearer plants (a) Equity share capital
(f) Property, Plant and Equipment (b) Other equity
(g) Capital work-in-progress Total Liabilities and Equity
(h) Intangible assets under development
(i) Goodwill Illustrative format of Statement
(j) Other intangible assets
(k) Other non-financial assets (to be specified) Particulars
Total Assets Revenue from operations
(i) Interest income
LIABILITES AND EQUITY
(ii) Dividend income
LIABILITIES
(iii) Rental income
(1) Financial Liabilities (iv) Fee and commission income
(i) Derivative financial instruments (v) Net gain on fair vale chang
(ii) Payables (vi) Net gain on derecognition o
(I) Trade Payables under amortised category
• Total outstanding dues of micro (vii) Sale of products (including
(viii)Sale of services
enterprises and small enterprises
(ix) Others (to be specified)
• Total outstanding dues of creditors Total revenue from operations (I)
other than micro enterprises and small Other income (to be specified) (
enterprises Total Income (III = I + II)
(II) Other Payables Expenses
(a) Finance costs
(b) Fees and commission expens
(c) Net loss on fair value change

22 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 NBFC

tatements by NBFCs under Ind- AS.

eet under Division III of Schedule III Continue...
(d) Net loss on derecognition of financial instruments
under amortised category
Notes CY PY (e) Impairment on financial instruments
(f) Cost of material consumed
micro enterprises (g) Purchases of stock-in-trade
(h) Changes in Inventories of finished goods,
creditorsother than stock-in-trade and work-in- progress
all enterprise (i) Employee Benefits Expenses
(j) Depreciation, amortization and impairment
securities) (k) Other expenses (to be specified)
Total Expenses (IV)
Profit / (loss) before exceptional items and
be specified) tax (V= III - IV)
Exceptional items (VI)
Profit / (loss) before tax (VII= V - VI)
net)
Tax Expense (VIII):
(1) Current tax
net)
(2) Deferred tax
ilities Profit / (loss) for the period from continuing
operations (IX= VII - VIII)
Profit / (loss) for the period from discontinued
operations (X)
Tax Expense of discontinued operations (XI)
Profit / (loss) for the period from discontinued
operations after tax (XII= X - XI)
Profit / (loss) for the period (XIII = IX+ XII)
of Profit and Loss prescribed under Divi- Other Comprehensive Income (XIV)
(A) (i) Items that will not be reclassified to profit or
Note CY PY
loss (specify items and amounts)
(ii) Income tax relating to items that will not
be reclassifiedto profit or loss SUB-TOTAL (A)
(B) (i) Items that will be reclassified to profit or
loss (specify items and amounts)
e
(ii) Income tax relating to items that will be
ges
reclassified to profit or loss SUB-TOTAL (B)
of financial instruments
Other Comprehensive Income (A+B)
Total Comprehensive Income for the period
Excise duty)
(XV = XIII + XIV) (Comprising Profit (Loss) and
other Comprehensive Income for the period)
Earnings per equity share (for continuing
)
operations) (XVI)
(II)
Basic (`) & Diluted (`)
Earnings per equity share (for discont. op.) (XVII)
Basic (`) & Diluted (`)
Earnings per equity share (XVIII)
se
Basic (`) & Diluted (`)
es

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 23