Commercial banks operate as scheduled and non-scheduled banks. The Banking Regulation Act, of 1949 regulates commercial banks. Scheduled banks are defined in the 2nd schedule of the RBI Act. The banks not listed in the 2nd schedule of the RBI Act are the non-scheduled banks. Urban co-operative banks offer services to semi-urban and urban areas. NBFC is a company registered under the Companies Act but does not have a banking license. The international or national banking regulatory agency monitors the NBFC in India.
Recently, RBI governor, Shaktikanta Das said in the media that the Indian banking system has a strong defence mechanism. After COVID-19, RBI introduced new measures such as targeted term repo operations, marginal standing facility and cash reserve ratio. RBI directs the banks to move from an internal audit system to a risk-based internal audit system. The blog talks about the concurrent audit and freedom of auditors. The PDC of ICAI provides clarification of the auditor appointment. The RBI guidelines had issued guidelines regarding statutory or central auditor appointments.
- The guidelines mentioned by RBI are for the financial year 2021 to 22. The NBFC and UCB companies are implementing the audit guidelines for the first time from 2021 to 22. The RBI provides flexibility to NBFC and UCB in following these guidelines. The companies can follow the rules from the second half of the financial year 2021 to 22.
- Every year the commercial banks and UCBs should request approval from RBI for appointment and re-appointment of statutory or central auditors.
- The commercial banks shall approach the office located in the Mumbai region.
- The UCBs shall get approval from the regional office of RBI in which the bank operates.
- NBFCs are supervised by national and international agencies. The NBFC is not required to get approval from RBI for the appointment of an auditor. However, the information regarding the appointment should reach the RBI through Form A. The NBFC should get the certificate within one month of auditor appointment.
- Public sector banks should allot the top 20 branches to SCAs. The top 20 branches are selected based on the outstanding advances.
- For investment and payment banks, the SCAs shall audit the top 20 branches. The top 20 branches are selected based on outstanding advances. NBFCs must audit branch accounts as per the provisions in section 143 (8) of the Companies Act.
- The audit committee of the commercial bank and NBFC will check the conflict of interest and independence of auditors. The committee will flag the concerns with relevant regulatory compliances, practices and standards. The committee take the concerns to the board of directors and senior manager of RBI.
- The non-audit works done by SAs and SCAs must have a time gap of at least one year from the appointment of an auditor. If the audit firm provides non-audit services to the client, it should not result in a conflict of interest.
- The audit committee of the board inspect the performance of the auditors after the annual audit. If the board finds negligence or lapses, the issues are reported to the RBI within two months of the annual audit.
- The rotation of audit firms or auditors is for three years. In the tenure of auditors, if the commercial bank or UCB want to remove the auditor, it is with the approval of the authority from RBI.
- NBFCs remove the audit firm before three years with information to the RBI about the decision. The company should give a justification for the decision with reasons.
- The maximum number of statutory audits of one firm can be four commercial banks, eight UCBs and eight NBFCs. The four commercial banks include one from PSB or NABARD, EXIM, NHB or SIDBI.
- The audit fees of PSB are as per the RBI instruction. The audit fees of other entities are according to the provisions.
- The entity shall frame a policy regarding the appointment of SA or SCA with the board. The policy of the entity is published on the website of the company to maintain transparency in the appointment process.
- The number of auditors and the asset size of the entity should go hand in hand. The asset size is divided as above 15,000 crore, above 1000 crore below 15,000 crore, and up to 1000 crore. The asset size of the entity decides the number of FTP, FCA, CA and professional staff to be appointed.
The job of an auditor in commercial banks:
In commercial banks, the AGM appoints the statutory auditor. In a nationalised bank, the board of directors appoint the statutory auditor. The appointment of an auditor should satisfy the RBI guidelines. The banks should get approval from the Reserve Bank for auditor appointments. The auditor checks the compliances, loopholes, and irregularities. Auditors check the risk factors and recommend the best practices to strengthen the internal system. Banks appoint chartered accountants with five to six years of experience in the auditing industry.
The job of an auditor at UCB:
The Income Tax Act, State Co-op Act and Reserve Bank of India give importance to statutory audit. Statutory auditors identify the gaps in business operations, understand the risk in vulnerable areas, and improve efficacy. Statutory auditors verify the SLR requirements of UCBs. Statutory in Urban co-operative banks check the following details:
- Calculation of net DTL and SLR.
- Check the CRAR calculation.
- Check the asset classification, income recognition and provisions are as per the guidelines of RBI.
- Check the reconciliation, valuation and operations of an investment portfolio.
- Check the group and single borrowers list.
- Check the norms of RBI on system-based asset classification.
- Check the compliances related to ‘COVID-19-regulatory package.
- Check the calculation of interest rates. The interest rates should be calculated as per the master directions and instructions on the management of advances.
- Check the assessment of deposits and premiums.
- Check the loans and priority sector details. The loans should be approved according to the master directions of RBI.
- The statutory auditor checks the interest subvention scheme.
- Check the profit and loss statement and reconciliation of the general ledger.
- Check the outstanding amounts with a period exceeding three years.
- If the SA suspects fraudulent activity in the auditing process, he will point out the same to the RBI.
- Check the provisions made for new NPA accounts.
- Check the reports of the bank to CRILC.
The job of an auditor in NBFC:
NBFC companies are divided into asset finance companies, Loan Company and Investment Company. Process, product and system are the three types of NBFC audit. The auditors check the MOA, AOA, minutes of board meetings, recovery system, periodical review of the bank advances, compliance of net owned fund, find the type of company, deposit quantum and credit rating, source of investments, asset classification, accounting standards, capital adequacy norms and doubtful debts.
A chartered accountant works in the manufacturing and banking sectors. Because of RBI guidelines, the appointment of an auditor has become mandatory in the banking sector.