The Hindu Business Line : Financial statements of NBFCs — More responsibilities for the auditor

The Diamond Jubilee Celebrations of the Institute of Chartered Accountants of India (ICAI) have begun in right earnest with an eclectic variety of programmes being conducted all over the country. The ICAI’s achievement in creating an elite tier of accountants is noteworthy. However, this is only the beginning, with a lot more to be done in terms of transitioning to IFRS, creating a second-tier of accountants for those not-so-lucky ones and keeping members interested in the profession.

A lot has changed from the days a sign-board on a wall outside the Institute premises in Chennai read “Jesus Christ never fails”, to which a disconsolate CA finalist added a suffix “until he appears for the CA exam”.

One of the highlights of the profession over the last 50 years has been the fact that other Acts have always provided work for chartered accountants. Commencing with the Companies Act and its MAOCARO/CARO reports, the Income Tax Act with its Tax Audit report, Clause 49 of the Listing Agreement with its emphasis on governance or the Reserve Bank of India with its bank audits, action has never been lacking on this front.

Non-banking financial companies (NBFCs) are governed by a separate Act and overseen by the RBI. There is a general impression that there are more black sheep than white among NBFCs; the RBI has, thus, decided to cast additional responsibilities on auditors who audit financial statements of NBFCs.

Additional norms

Henceforth, auditors of NBFCs would have to report whether the company has applied for registration as provided in Section 45IA of the Reserve Bank of India Act, 1934 (2 of 1934), if it is a company incorporated before January 9, 1997 and whether it has received any communication from the RBI about the grant of or refusal of certificate of registration to it, and whether the company has obtained a certificate of registration from the RBI if it is a company incorporated on or after January 9, 1997.

In the case of a non-banking financial company accepting/holding public deposits, the auditors would additionally have to report:

(i) whether the public deposits accepted by the company together with other borrowings are within the limits admissible to the company as per the provisions of the Non-Banking Financial Companies (Reserve Bank) Directions, 1998;

(ii) whether the credit rating for fixed deposits assigned by the Credit Rating Agency is in force and the aggregate amount of deposits outstanding as at any point during the year has exceeded the limit specified by the Rating Agency;

(iii) whether the company has defaulted in paying to its depositors the interest and/or principal amount of the deposits after such interest and/or principal became due;

(iv) whether the company has complied with the prudential norms on income recognition, accounting standards, asset classification, provisioning for bad and doubtful debts, and concentration of credit/investments as specified in the directions issued by the Reserve Bank of India in terms of the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998;

(v) whether the capital adequacy ratio as disclosed in the return submitted to the Reserve Bank of India in terms of the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 has been correctly determined and whether such ratio is in compliance with the minimum Capital to Risk Asset Ratio prescribed by Reserve Bank of India;

(vi) whether the company has complied with the prescribed liquidity requirement and kept the approved securities with a designated bank;

(vii) whether the company has furnished to the RBI within the stipulated period the half-yearly return on prudential norms as specified in the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998; and

(viii) whether the company has furnished to the Reserve Bank of India within the stipulated period the return on deposits as specified in the First Schedule to the Non-Banking Financial Companies (Reserve Bank) Directions, 1998.

In the case of NBFCs not accepting public deposits or investment companies that have invested not less than 90 per cent of their assets in the securities of group companies, resolutions from the Board would have to reported along with the fact whether the NBFC has accepted public deposits or the 90 per cent barrier has been breached at any time during the year.

Watchdog

The new requirements have cast a responsibility on the auditor to report on any minor deviation from the stringent norms prescribed by the RBI for NBFCs. Considering the new norms and audit times shrinking, it is only to be expected that auditors would need to be ever more careful. Else, they could end up as scapegoats.

(The author is a Hyderabad-based chartered accountant.)

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