In order to strengthen the high quality and effectiveness of the internal audit method, the Reserve Bank of India (RBI) on Wednesday issued suggestions on danger-based internal audit (RBIA) method for pick non-bank lenders and urban co-operative banks (UCBs). While NBFCs and UCBs have grown in size and turn out to be systemically crucial, prevalence of distinctive audit systems/approaches in such entities has made particular inconsistencies, dangers and gaps, RBI stated. The entities have to implement the RBIA framework by March 31, 2022, and have been asked to constitute a committee of senior executives, to be entrusted with the duty of formulating a appropriate action program.
The new framework will be for all deposit taking NBFCs, irrespective of their sizes, all non-deposit taking NBFCs (which includes core investment corporations) with an asset size of `5,000 crore and also for all UCBs, possessing an asset size of `500 crore and above. The NBFCs and UCBs face dangers related to the ones faced by scheduled industrial banks, which demand an alignment of processes, the central bank stated.
Amit Tandon, founder and managing director (MD) of Institutional Investor Advisory Services (IiAS), stated, “This aligns the supervision of NBFCs to those of banks. I view this as a step in easing of conversion of NBFCs to banks.”
To make certain smooth transition from the current method of internal audit to RBIA, the NBFCs and UCBs concerned may well constitute a committee of senior executives with the duty of formulating a appropriate action program, RBI stated. The committee may well address transitional and modify management problems and need to report progress periodically to the board and senior management. According to the new suggestions, the boards of NBFCs and UCBs are mainly accountable for overseeing their internal audit functions.
The regulator also specified that RBIA policy shall clearly document the objective, authority, and duty of the internal audit activity, with a clear demarcation of the part and expectations from danger management function and danger -based internal audit function.
Shriram Subramanian, founder and MD of InGovern Research Services, a corporate governance advisory firm, stated as NBFCs and UCBs have turn out to be big, it is pragmatic to have RBIA functionally and report to the board. “However, RBIA should not be seen as a panacea for failures and frauds, as even in large scheduled commercial banks like Yes Bank, Lakshmi Vilas Bank (LVB), etc. where there is directed lending and where RBIA existed, bank failures have occurred,” he added. RBI need to also not see this as an abdication of its supervisory part and responsibilities, he stated.
RBIA is an audit methodology that hyperlinks with an organisation’s all round danger management framework and delivers an assurance to the board of directors and the senior management on the high quality and effectiveness of the organisation’s internal controls, danger management and governance-associated systems and processes, the regulator stated.
RBI, in its monetary policy statement on December 4, 2020, had announced that appropriate suggestions would be issued to big UCBs and NBFCs for the adoption of RBIA to strengthen the internal audit function, which operates as a third line of defence.