RBI to mandate risk-based internal audit for large UCBs, NBFCs

The Reserve Bank of India (RBI) has decided to bring large Urban Cooperative Banks (UCBs) and Non-Banking Finance Companies (NBFCs) within the Risk Based Internal Audit (RBIA) net. It may be recalled that the RBIA was mandated for commercial banks in 2002.

The RBI also has decided to harmonise guidelines on appointment of Statutory Auditors for commercial banks, UCBs and NBFCs. The new guidelines will enable Supervised Entities (SEs) to appoint the audit firms as per their needs in a timely, transparent and effective manner. This is expected to improve the quality of financial reporting of SEs.

These changes are reflected in the Monetary Policy Review statement issued on Friday. The central bank has clearly mentioned in the review that internal audit function needs to be strengthened in UCBs and NBFCs.

Commenting on the RBI announcement, Ashok Haldia, former CA Institute Secretary, said that measures announced in the monetary policy for strengthening the audit system focussing on risk-based audit, internal audit and appointment of auditors in UCBs and NBFCs were a long-felt need. The policy contemplates harmonisation with the frame work applicable for commercial banks, which are internationally benchmarked and robust. However ,while doing so, the RBI should ensure for commensurate capacity building in UCBs and NBFCs. There should be an effective supervision mechanism in the RBI for compliance, and steps need to be taken to address inadequacies noticed in the existing mechanism for timely appointment of statutory auditors in commercial banks in a transparent and effective manner, he said.

Since June 2020, UCBs are brought under the supervisory power of the RBI after the collapse of PMC Bank. It has, thus, direct responsibility of safeguarding interest of more than 8.5 crore of depositors of UCBs, he said.

“The commercial banks ,UCBs and NBFCs all have commonality as they mobilise public savings and lend. The principles of corporate governance, internal and external supervisory framework should apply with same rigour. Thus, the current approach of different frame work in supervisory mechanism for commercial banks, UCBs and NBFC is not prudent from financial and regulatory perspective, and is one of the reason for governance failure or frauds noticed in UCBs and NBFCs,” said Haldia.

Srinath Sridharan, an independent markets commentator, said the practice of internal audit and its reporting to the board is in practice in most well-governed NBFCs.

The move to harmonise the guidelines for statutory auditors is positive. More importantly, it should prescribe the ‘what-if’ aspect of reporting in detail. The ‘what-if’ should be prescriptive in how to deal with any issues that could get highlighted, as well as ‘how’ and ‘how-soon’ to escalate it to the regulator, he said.