Chapter 20 - Audit of NBFC (Chart 1 – Basics)
TYPES OF NBFC
(a) Asset Finance Company:
 Hire Purchase Finance Company
 Equipment Leasing Finance Companies.
(b) Investment company.
(c) Loan Company.
(d) Infrastructure Finance Company.
(e) Core Investment Company.
(f) Infrastructure debt Fund-NBFC.
(g) NBFC-Micro Finance Institution.
INFRASTRUCTURE FINANCE COMPANIES
Non deposit taking NBFC that fulfills criteria mentioned below:
(i) Min. 75% of total assets deployed in infrastructure loans;
(ii) Net owned funds of Rs. 300 crore or above;
(iii) Min. credit rating 'A' or equivalent of CRISIL, FITCH, CARE,
ICRA or equivalent rating;
(iv) Capital to Risk Asset Ratio (CRAR) of 15%.
CORE INVESTMENT COMPANIES
NBFC carrying on the business of acquisition of shares and
securities which satisfies the following conditions:
(a) Min. 90% of total assets is in form of investment in equity
shares, preference shares, debt or loans in group
companies;
(b) Investments in equity shares in group companies
constitutes not less than 60% of its total assets;
(c) No trading in shares, debt or loans in group companies
except through block sale for disinvestment;
(d) It does not carry on any other financial activity except
investment in bank deposits, money market instruments,
govt securities, loans & investments in debt issuances of
group companies.
Compiled by: CA. Pankaj Garg
Prudential Norms
Capital  Every NBFC shall maintain a capital ratio consisting of Tier I & Tier II capital of its aggregate risk
Requirements weighted assets on-balance sheet and of risk adjusted value of off-balance sheet items, which shall
not be less than 15%.
 Tier I Capital shall not be less than 10%.
Income  The income recognition shall be based on recognised accounting principles.
Recognition  In case of NPA, income including interest/discount/hire charges/lease rentals etc. shall be
recognised only when it is actually realised.
 In case of NPA, any income recognised before the asset became NPA and remaining unrealised shall
be reversed.
Asset Every NBFC shall, classify its lease/hire purchase assets, loans and advances and any other forms of
Classification credit into the following classes, namely:
(a) Standard assets; (b) Sub-standard assets; (c) Doubtful assets; and (d) Loss assets.
Non- (a) asset, in respect of which, interest remained overdue for a period of 3 months or more;
Performing (b) term loan inclusive of unpaid interest, when the instalment is overdue for a period of >3 months
Assets or on which interest amount remained overdue for a period of 3 months or more;
(c) demand or call loan, which remained overdue for a period of >3 months from the date of demand
or call or on which interest amount remained overdue for a period > 3 months;
(d) a bill which remains overdue for a period of 3 months or more;
(e) the interest in respect of a debt or the income on receivables under head ‘other current assets’ in
the nature of short term advances, which facility remained overdue for period of >3 months;
(f) any dues on account of sale of assets or services rendered or reimbursement of expenses
incurred, which remained overdue for a period of 3 months or more;
(g) the lease rental and hire purchase instalment, which has become overdue for a period of 3
months or more;
(h) in respect of loans, advances and other credit facilities, the balance outstanding under the credit
facilities (including accrued interest) made available to the same borrower/beneficiary when any
of the above credit facilities becomes non-performing asset.
Provisioning  Standard Assets – 0.40%
Requirements  Sub-Standard Assets – 10% Compiled by: CA. Pankaj Garg
 Doubtful Assets: Unsecured portion - 100%
 Doubtful Assets: Secured Portion – 20% (One year), 30% (one to three years), 50% (>3 years).
 Loss Assets – 100%.
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 Chapter 20 - Audit of NBFC (Chart 2 – Basics)
ASPECTS OF AUDIT PROCEDURE Classification of Frauds

Ascertain the Study the following: In order to have uniformity in reporting, frauds have been
business of  MOA & AOA classified as under based mainly on the provisions of the
NBFC  Business Policies Indian Penal Code:
 Minutes of Board / Committee meetings (a) Misappropriation and criminal breach of trust.
Evaluation of  To examine whether I.C. exist, effective and continued. (b) Fraudulent encashment through forged instruments,
I.C. System manipulation of books of account or through
 Review the effectiveness of system of recovery and periodical review of advances.
fictitious accounts and conversion of property.
Regn. with RBI Obtain a copy of certificate of registration granted by the RBI
(c) Unauthorised credit facilities extended for reward or
Public deposit 1. Credit Rating: Obtain a copy of credit rating assigned to NBFC.
for illegal gratification.
Directions 2. Interest and Brokerage payments: to ensure that it is not paid in excess.
(d) Negligence and cash shortages. Reporting as fraud is
3. Written application: ensure that deposits has accepted with written application.
required only if the intention to cheat/defraud is
4. Deposit register: Examine that correct particulars entered in the register.
suspected/proved. However, if fraudulent intention is
5. Repayment of deposits: Examine - regular repayment of deposits on due date.
not suspected/proved, at the time of detection, cases
6. Custody of investments: Obtain certificate that investments are kept in safe custody.
of negligence and cash shortage will be treated as
7. Submission of accounts: Audited accounts, F.S. & Auditor’s report submitted on time.
fraud and reported, if:
8. Filing of annual return: Annual Return is filed in specified time.
 Cash shortages are more than Rs. 10,000/- and
9. Board Resolution in case of non-acceptance of deposits.
 Cash shortages are more than Rs. 5000/- and
Prudential 1. Verification of compliance of prudential norms w.r.t. detected by management/auditor/inspecting
Norms  Income recognition officer and not reported on the occurrence by the
 Income from investments persons handling cash.
 Asset classification (e) Cheating and forgery.
 Capital Adequacy norms (f) Irregularities in foreign exchange transactions.
 Granting loan against own shares Reporting as fraud is required only if the intention to
 Norms for concentration of credit cheat/ defraud is suspected/proved.
2. Policy for granting Demand loans: has been framed by BOD. (g) Any other type of fraud not coming under the specific
3. Classification of advances: has been made in accordance with the directions. heads as above.
4. Income from NPA: Ensure that income from NPA has not been recognized.
5. Recovery from NPA: Check the recovery made in the NPAs account. Compiled by: CA. Pankaj Garg

Compiled by: CA. Pankaj Garg Page 2

 Chapter 20 - Audit of NBFC (Chart 3 – Audit Check List)
Equipment Leasing Finance Co.
(i) Credit appraisal System:
Ascertain whether the NBFC has
an adequate appraisal system for
extending equipment leasing
finance.
(ii) Physical verification: Verify
existence of adequate system to
ensure installation of assets and
their periodic physical verification.
(iii) Maintenance of assets: Ascertain
whether the NBFC has an adequate
system for monitoring whether the
assets have been adequately
insured against and regular
maintenance of the leased assets is
being carried out by the lessee.
(iv) Verification of Lease Agreement:
Verify the lease agreement entered
into with the lessee to ascertain
the terms & conditions.
(v) Compliance of AS–19: Verify
whether the AS 19 issued by the
ICAI in respect of “Leases” has
been complied with.
Compiled by:
CA. Pankaj Garg
Compiled by: CA. Pankaj Garg
Hire Purchase Company
(i) Credit Appraisal System: Ascertain
existence of an adequate appraisal
system for hire-purchase finance.
(ii) Verifications of Payments: Verify
that payments for assets are made
directly to vendor and assets are
property charged in name of NBFC.
(iii) Physical Verification: Ascertain the
adequacy of system in place to
ensure installation of the asset and
their periodic physical verification.
(iv) Verification of Endorsement: If the
finance is against vehicles, the
registration certificate should contain
an endorsement in favor of the NBFC.
(v) Regularity of HP Installments:
Check whether installments are
received regularly. In case of any
overdue, examine whether adequate
provision has been made.
(vi) Insurance of Asset: The auditor
should verify that hire purchase
assets are adequately insured.
(vii) Valuation aspects: Ensure that
goods sold on hire purchase & goods
repossessed valued properly.
(viii) Recognition of finance charges:
Examine the method of accounting
followed for appropriation of finance
charges over the period of contract.
Loan Company
(i) Sanctioning: Examine whether
loan or advance has been
properly sanctioned.
(ii) Security: Verify the security
obtained and the agreements
entered into, if any.
(iii) Balance Confirmations: Obtain
balance confirmations from the
concerned parties.
(iv) Maintenance of Records in case
of bills discounting: Verify that
proper records have been
maintained.
(v) Ceiling Limits: Ensure that NBFC
has not lent in excess of the
specified limits.
(vi) Loans against own shares:
Ensure NBFC has not advanced
any loans against the security of
its own shares.
(vii) Monitoring and follow up:
Verify existence an adequate
system of appraisal and follow up
of loans and advances.
(viii) Compliance of prudential
norms: Ensure classification of
loans and advances into Standard,
Sub-Standard, doubtful and loss
assets and the provision for bad
and doubtful debts are being
made as per NBFC Prudential
Norms Directions.
Investment Company
(i) Physical Verification: of all the shares
and securities held by a NBFC.
(ii) Compliance with Prudential Norms:
NBFC Prudential Norms are:
 Lending: < 15% of its owned funds
to any single borrower and < 25%
to any single group of borrower.
 Investment: < 15% of owned funds
in a single entity and < 25% of
owned funds in a single group of
entities.
 Lending and Investment: < 25%
of owned funds in a single entity & <
40% of owned funds in a single
group.
(iii) Income from Investments: NBFC
prudential norm requires dividend on
shares of companies & units of mutual
funds to be recognised on cash basis.
(iv) Classification of investments: into
current or long term investments.
(v) Valuation of Investments: in
accordance with NBFC Prudential
Norms. Ensure compliance of AS 13 (to
the extent they are not inconsistent
with the directions).
(vi) Investment in group companies:
Obtain a list of subsidiary/group
companies from the management and
verify.
(vii) Obtain a confirmation from third
parties where the investments are kept
deposited with them.
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 Chapter 20 - Audit of NBFC (Chart 4– NBFC Auditor’s Report (Reserve Bank) Directions, 2016)
1. Whether the company has obtained a Certificate of Registration (CoR) from the Bank (RBI).
All NBFC 2. In case the company holding CoR issued by the Bank, whether company is entitled to continue to hold CoR in terms of its asset/income pattern.
3. Whether NBFC is meeting the required net owned funds requirement as laid down in directions issued by RBI.
1. Whether public deposits accepted by the company are within the limits as per NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016;
2. Whether the public deposits held in excess of permissible amount are regularised.
3. Whether the NBFC is accepting "public deposit” without minimum investment grade credit rating from approved agency;
4. Whether the Capital Adequacy Ratio as disclosed in the return submitted to the Bank has been correctly determined.
5. Whether the credit rating, for each of the fixed deposits schemes that has been assigned by Credit Rating Agencies (a) is in force; and (b) whether the aggregate
amount of deposits outstanding as at any point during the year has exceeded the limit specified by Credit Rating Agency;
6. Whether company has violated any restriction on acceptance of public deposit as provided in NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
NBFC accepting
7. Whether the company has defaulted in paying to its depositors the interest and /or principal amount of the deposits after it became due;
Public Deposits
8. Whether the company has complied with the prudential norms on income recognition, asset classification, provisioning for bad and doubtful debts, and
Para 3 concentration of credit/investments.
9. Whether the company has complied with the liquid assets requirement as prescribed.
10. Whether the company has furnished to the Bank within the stipulated period the return on deposits.
11. Whether the company has furnished to the Bank within the stipulated period the quarterly return on prudential norms.
12. Whether, in the case of opening of new branches or offices to collect deposits or in the case of closure of existing branches/offices or in the case of appointment of
agent, the company has complied with the requirements.
1. Whether the BOD has passed a resolution for non- acceptance of any public deposits.
2. Whether the company has accepted any public deposits during the relevant period/year;
NBFC not 3. Whether the company has complied with the prudential norms relating to income recognition, asset classification and provisioning for bad and doubtful debts.
accepting 4. In respect of Systemically Important Non-deposit taking NBFCs:
public deposits (a) whether the capital adequacy ratio as disclosed in the return submitted to the Bank, has been correctly arrived at; and
(b) whether the company has furnished to the Bank the annual statement of capital funds, risk asset ratio within the stipulated period.
5. Whether the NBFC has been correctly classified as NBFC Micro Finance Institution.
 Where, in the auditor’s report, the statement regarding any of the items referred to in paragraph 3 above is unfavourable or qualified, the auditor’s report shall
Reasons to be stated
also state the reasons for such unfavourable or qualified statement, as the case may be.
Para 4 for unfavorable or
qualified statements  Where the auditor is unable to express any opinion on any of the items referred to in paragraph 3 above, his report shall indicate such fact together with reasons
therefore.
Where, in the case of a NBFC, the statement regarding any of the items referred to in Para 3, is unfavourable or qualified, or in the opinion of the auditor the company
has not complied with:
(a) the provisions of Chapter III B of Reserve Bank of India Act, 1934; or Compiled by: CA. Pankaj Garg
Exception (b) the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
Para 5
Report (c) NBFC–Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 and NBFC-Systemically Important Non-Deposit taking Company
and Deposit taking Company (Reserve Bank) Directions, 2016
it shall be the obligation of auditor to make a report containing details of such unfavourable/qualified statements and non-compliance in respect of the company to the
concerned Regional Office of the Department of Non-Banking Supervision of the Bank under whose jurisdiction the registered office of the company is located.

Compiled by: CA. Pankaj Garg Page 4