jb nagar study circle 08-09-2013 ca bhavesh vora 1

NBFC Auditors Report Directions, 2008

JB Nagar Study Circle

08-09-2013 CA Bhavesh Vora 1

CoverageIntroduction

Auditor’s Report (Reserve Bank) Directions, 2008

Important audit points

Other important areas of compliances

Standards of Auditing

Penalties under RBI Act, 1934

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IntroductionThe 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 interestIn the interest of the depositorsFor the purpose of proper assessment of the

books of accounts

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Auditor’s report (Reserve Bank) Directions, 1998 repealed

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Auditor’s Report DirectionsApplicabilitySeparate 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…ContMatters to be included in the auditor’s reportThe 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…ContII. 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…ContPoints 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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http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=4494&Mode=0

http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=4494&Mode=0

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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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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Auditor’s Report…Reporting in case of Non-banking financial company NOT accepting public depositsApart from the enumerated aspects applicable for all NBFCs - the auditor shall include a statement on the following matters, namely:-1. Resolution for non-acceptance of Public

Deposits2. Accepted any deposits?3. Compliance with Prudential Norms

Income recognition Accounting standards Asset classification and provisioning for bad

and doubtful debts11CA Bhavesh Vora JB Nagar CPE Study

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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 RBIAuditor’s statement on whether the company has obtained a specific advice from RBI? Whether those conditions are complied? 12CA Bhavesh Vora JB Nagar CPE Study

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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 RBIBoard report and the letter to RBI should

be in syncDiscussion with the clientLetter received by auditors directly from

RBIProposed Remedial Measures 15CA Bhavesh Vora JB Nagar CPE Study

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Important Audit PointsInvestment AccountingNPA Accounting and provisioningCapital AdequacyIncome RecognitionAsset SizeAsset Income PatternKYC CompliancesPMLA Compliances


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Provisioning NormsStandard 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 AssetsRemains sub standard asset for period of 18 months

and aboveProvide 100% of uncovered outstanding amount


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Provisioning NormsTo the extent of unsecured loan which is covered by

value of realizable securities, the provisioning required based on the period the asset has remained doubtfuli. 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) orPotential 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) 18CA Bhavesh Vora JB Nagar CPE Study

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Other Important NormsInvestment 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 policyAsset classification into Standard, Sub

standard, Doubtful and loss assets and provisioning requirements on these assets


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Other Important Prudential Norms..Various disclosures should be made in the

Balance sheetFormation of audit committeeSchedule to be appended to the balance

sheetSubmission of statutory auditor’s certificateCannot give loan against own sharesCommunicate within 30 days important

changes as prescribed20CA Bhavesh Vora JB Nagar CPE Study

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Standards on AuditingAll 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 AuditorsSA 620 – Using the work of an Auditor’s Expert


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PenaltyDeposit 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)) 22CA Bhavesh Vora JB Nagar CPE Study

Circle08-09-2013

NBFC Auditors Report Directions, 2008

JB Nagar Study Circle

CA Bhavesh Vora 2308-09-2013

jb nagar study circle 08-09-2013 ca bhavesh vora 1

Documents

jb nagar study circle

auditors report applicability

auditors reportcont

auditors reportcont

additional report

nbfcs exception report

nonregistered deemed

asset finance companies