1. Expectations from Auditors of NBFCs ==========================
Expectations from Auditors of NBFCs ========================== RBI, New Delhi

2. What is an NBFC A Non-Banking Financial Company (NBFC) is a company
Registered under the Companies Act, 1956
Its principal business is lending, investments in various types of shares/stocks/bonds/debentures/securities, leasing, hire-purchase, insurance business, chit business
An NBFC does not include any institution whose principal business is agricultural activity, industrial activity, trading activity or sale/purchase/construction of immovable property.
Entities NOT regulated by RBI
Insurance companies, stock broking and merchant banking companies, venture capital companies, Nidhis, housing finance companies and Chit Fund Companies not regulated by the Reserve Bank of India – to avoid dual regulation – Coordination through State Level Coordination Committee (SLCC) between various regulators

3. How to identify an NBFC
The Company needs to fulfil the Principal Business Criteria of being an NBFC.
The definition of ‘Principal Business’ given, vide, Press Release /1269 dated April 8, 1999
(No NBFC shall commence or carry on the business of a NBFI without obtaining a certificate of registration and having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding two hundred lakh rupees)
The auditors of all NBFCs are required to report directly to the Reserve Bank the non-compliance by any company of the above statutory provisions.)
The Company will be treated as an NBFC if its financial assets are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets is more than 50 per cent of the gross income. Both these tests are required to be satisfied as the determinant factor for principal business of a company.
Note - Financial assets do not include cash and cash equivalents, fixed deposits with banks. Further, financial income does not include income received from such assets. Investment in mutual funds are considered part of financial assets.

4. Types of NBFCs
Based on Liabilities Category ‘A’ companies (Deposit taking) - NBFCs having public deposits or NBFCs-D Category ‘B’ companies (Non-Deposit taking) - NBFCs not having public deposits or NBFCs-ND. The Companies having asset size more than Rs.100 crore considered as NBFCs-ND-SIs (Systemically Important) Based on Activities Loan Companies (LCs), Investment Companies (ICs), Asset Finance Companies (AFCs), Infrastructure Finance Companies (IFCs), Core Investment Companies (CICs), Factor Companies, Micro Finance Institutions, Mortgage Guarantee Companies, RNBCs

5. Provisions of the RBI Act, 1934
Chapter III B Section 45-IA - Requirement of registration and net owned fund Section 45IB - Maintenance of percentage of assets (To be invested in unencumbered approved securities not less than fifteen percent of the deposits outstanding at the close of business on the last working day of the second preceding quarter (5% in the form of bank fixed deposits) Penal Interest 3% over Bank Rate in case of shortfall in that 5% over Bank Rate for subsequent quarter Section 45IC- Maintenance of Reserve fund (Every NBFC shall create a reserve fund and transfer therein a sum not less than twenty per cent of its net profit every year as disclosed in the profit and loss account and before any dividend is declared) Section 45MA - Powers and Duties of Auditors (Auditors have been assigned greater role in indirect supervision of the NBFCs and made accountable to submit exception reports on violation/contraventions of RBI Directions/Act)
(Also the bank may cancel a certificate of registration granted to an NBFC under this section if such Company ceases to carry on the business of a NBFI and has failed to comply with any condition subject to which the certificate of registration had been issued to it)
Net Owned Funds - The aggregate of the paid-up equity capital (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) and free reserves as disclosed in the latest balance sheet of the Company after deducting therefrom intangibles (accumulated balance of losses, deferred revenue expenditure, prepaid expenses and any other items of intangible nature). It is further reduced by excess of 10% of investments in group companies/other NBFCs and loans to group companies.

6. Monitoring of NBFCs Onsite Offsite Market Intelligence
Statutory Auditors

7. Important Circulars
DNBS (PD) CC No. 334 / / July 1, “Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008.”
Press Release April 8, 1999 – Principal Business Criteria
DNBS (PD) CC No 331/ / July 1, “Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998”
DNBS (PD) CC No.332 / / July 1, “Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007”
DNBS (PD) CC No.333/ / July 1, “Non-Banking Financial (Non - Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007”
DNBS(PD).CC.No 344./ / July 1, Master Circulars - Miscellaneous Instructions to All Non-Banking Financial Companies
DNBS (PD) CC No.343/ / July 1, Master Circulars - Miscellaneous Instructions to NBFC- ND-SI
DNBS.PD.CC.No.335 / / July 1, 2013 Master Circular - Returns to be submitted by NBFCs

8. Matters to be included in Auditor’s Report For all NBFCs
Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008
Directions apply to every auditor of an NBFC as defined in Section 45I(f) of the RBI Act, Auditors to submit Report to the Board of Directors in addition to the Report made under Section 227 of Companies Act, 1956 – Auditor’s Report
Matters to be included in Auditor’s Report
For all NBFCs
(To be submitted within one month from the date of finalization of the balance sheet and in any case not later than December 30th of that year)
Whether the Company is engaged in NBFI activity and obtained CoR (Section 45-IA – minimum NOF)
Whether the NBFC is entitled to hold CoR for its asset/income pattern as on March 31 (PBC) (Press Release)
In case of an AFC/MFI/Factor, whether it continues to be classified as per extant guidelines
NBFCs not to be partner in partnership firms

9. For Deposit Taking NBFCs
Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008
For Deposit Taking NBFCs
The public deposits (PDs) held by the Company are not excluded from the definition of public deposits.
In case of AFCs – whether the Company is accepting PD within admissible limits.
CRAR – 15% (AFC/LC/IC), whether CRAR has been arrived correctly
Default in paying its depositors, both Principal and Interest
Compliance to prudential norms on income recognition, accounting standards, asset classification, provisioning and concentration of credit/investments
Compliance to maintenance of liquid assets
Filing of Returns – NBS-1, Half-yearly returns
Opening/Closing Branches – Prior written permission required.
AFC not to invest in Land or Building and unquoted shares beyond 10% of owned funds. (LC/IC – 10% & 20%)
Rotation of partners of the statutory auditors audit firm - with public deposits/deposits of Rs.50 crore and above

10. For Non-Deposit Taking NBFCs
Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008
For Non-Deposit Taking NBFCs
Board Resolution for non-acceptance of PDs.
Whether the Company has accepted PDs.
Compliance to prudential norms on income recognition, accounting standards, asset classification, provisioning and concentration of credit/investments
In case of NBFCs-ND-SIs (>Rs.100 crore asset size – SA to inform)- CRAR disclosed in NBS_7 correctly arrived and the Company is in compliance to minimum CRAR (15%). Whether the Company has furnished the annual statement of capital funds, risk assets/exposures and risk asset ratio.
Disclosures in the balance sheet:
Provisions for bad and doubtful debts and depreciation in investments.
ND-SIs to disclose
Capital to Risk Assets Ratio (CRAR)
Exposure to real estate sector, both direct and indirect; and
Maturity pattern of assets and liabilities.
All ND-SI and deposit taking NBFCs to disclose the amount related to fraud, reported in the Company for the year

11. Exemption from registration
Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008
Exemption from registration
In case the Company has been exempted from registration, to confirm whether it is complying with the conditions stipulated as advised by the Bank.
Reasons for unfavourable or qualified statements
The auditor report shall state reasons, where the auditor is unable to express any opinion the report, the report shall indicate fact together with reasons therefor.
Obligation to submit an exception report
In case the Company has not complied with
Provisions of Chapter III B of the RBI Act,
NBFC Acceptance of Public Deposits Directions
NBFC (Deposit Accepting or Holding) Prudential Norms
NBFC (Non-Deposit Accepting or Holding) Prudential Norms
The Auditor shall report only contraventions of the provisions of the RBI Act, 1934 and shall NOT contain any statement with respect to compliance of any of those provisions.

12. Thank You