NBFC AUDIT COMPLIANCE CHECKLIST

In the dynamic world of financial services, Non-Banking Financial Companies (NBFCs) have a vital role to play. They act as a bridge between traditional banking institutions and the sections of society that are either unbanked or underbanked. However, this crucial role carries a significant burden  the need to comply with several regulatory obligations.

Understanding the intricate regulatory landscape that governs NBFCs can feel overwhelming, as failing to comply with these regulations can result in significant penalties and harm to one's reputation. Therefore, it is crucial to establish strong compliance measures in order to not only meet legal requirements but also enhance operational efficiency and build trust with stakeholders.

This comprehensive checklist is designed to help NBFCs navigate the complex world of regulatory compliance with ease. It serves as a roadmap, ensuring that NBFCs can effectively meet all the necessary requirements.

Checklist for NBFC Audit Compliance

1. Registering and Licencing for NBFCs Obtaining a Certificate of Registration (CoR)

• Obtaining CoR- To commence or continue its business of financial services, every NBFC must obtain a Certificate of Registration from the Reserve Bank of India (RBI). This is an essential legal obligation.
• Maintaining CoR-It is absolutely essential for NBFCs to maintain their CoR registration by strictly following all the prescribed norms and guidelines. Ensuring compliance and operational efficiency, the NBFC diligently adheres to the directives of the RBI, implementing regular updates and renewals.
• Net Owned Fund (NOF) Minimum Requirement: NBFCs are required to maintain a minimum Net Owned Fund (NOF) in order to be eligible for and maintain their Certificate of Registration (CoR). The financial threshold is established to guarantee the NBFC's financial stability and credibility.
• Standard Requirement: The RBI requires most NBFCs to maintain a minimum Net Owned Funds (NOF) of ₹2 crores. This requirement provides a necessary protection against potential financial shortcomings and helps to inspire trust among those involved.
• Compliance and Reporting: NBFCs must regularly report their Net Owned Funds (NOF) status to the RBI to ensure continuous adherence to this requirement. If the NOF criteria are not met, there can be consequences such as penalties, restrictions, or even the cancellation of the CoR.

2. Periodic Returns and Reporting for NBFCs Yearly Returns

Annual Returns

• Audited Financial Statements: NBFCs are required to submit their audited balance sheets and profit & loss accounts within 15 days from the date of their Annual General Meeting (AGM). This ensures that the financial health and operational results of the NBFC are transparent and verifiable.
• Annual Return on Deposits: Additionally, NBFCs must file an annual return on deposits, detailing the total deposits held, renewed, and repaid during the year. This helps the RBI monitor the NBFC’s compliance with deposit regulations and overall financial stability.

Quarterly Returns

• Capital Funds and Risk Assets: NBFCs must file quarterly statements detailing their capital funds and risk assets. These statements include key financial ratios and metrics that provide insights into the NBFC’s financial performance and risk management practices.
• Demand and Time Liabilities: A quarterly statement on demand and time liabilities must also be submitted. This statement provides information on the NBFC’s short-term and long-term liabilities, helping the RBI assess the liquidity and solvency position of the NBFC.

Monthly Returns

• Capital Market Exposure: NBFCs are required to file monthly returns on their exposure to capital markets. This includes details of investments in equities, bonds, and other market instruments, ensuring that the NBFC’s market risk is continuously monitored.
• Overseas Borrowings: Monthly reporting on overseas borrowings is mandatory. NBFCs must provide information on the amount, terms, and conditions of any funds borrowed from foreign sources, helping the RBI keep track of external liabilities.
• Large Exposures: NBFCs must submit monthly statements on large exposures, including significant loans and advances. This helps in assessing the concentration risk and ensuring that the NBFC is not overly exposed to a few large borrowers.

3. Statutory and Regulatory Requirements for NBFCs

Prudential Norms

• Income Recognition: NBFCs must follow RBI guidelines for recognizing income. Interest income on non-performing assets (NPAs) should not be accounted for unless it is actually received.
• Asset Classification: Assets must be classified into standard, sub-standard, doubtful, and loss assets based on the duration of overdue payments and other risk factors.
• Provisioning: Adequate provisions must be made for NPAs and other impaired assets. This involves setting aside a portion of profits to cover potential losses.
• Capital Adequacy: NBFCs are required to maintain a minimum Capital to Risk (Weighted) Assets Ratio (CRAR) to ensure they have enough capital to cover their risk exposures. The current requirement is typically around 15%.

KYC and AML Compliance

• Know Your Customer (KYC): NBFCs must have robust KYC policies to verify the identity of their clients. This includes collecting and verifying personal identification documents, conducting background checks, and maintaining detailed records.
• Anti-Money Laundering (AML): Implement AML policies to prevent and detect money laundering activities. This includes regular monitoring of transactions, reporting suspicious activities to the Financial Intelligence Unit (FIU-IND), and conducting periodic risk assessments.

Fair Practices Code (FPC)

• Adoption and Publicity: NBFCs must adopt a Fair Practices Code to ensure fair and transparent dealings with customers. This code should be publicly disclosed and easily accessible to customers.
• Customer Rights: The FPC should clearly outline the rights and responsibilities of customers, including transparency in loan terms, interest rates, and fees.
• Grievance Redressal: Establish a mechanism for addressing customer grievances promptly and effectively.

Corporate Governance

• Board Composition: Maintain a balanced board composition with an appropriate mix of executive and non-executive directors. Independent directors should be included to ensure unbiased oversight.
• Audit Committees: Establish audit committees to oversee financial reporting, internal controls, and compliance with regulatory requirements. These committees should be chaired by independent directors.
• Internal Controls: Implement strong internal control systems to ensure accuracy in financial reporting, compliance with laws, and protection of assets.
• Transparency and Accountability: Ensure transparency in operations through regular disclosures, adherence to ethical standards, and accountability in decision-making processes.

4. Financial Disclosures for NBFCs

Statutory Audit

• Annual Financial Statements: NBFCs are required to ensure that their annual financial statements, including balance sheets, profit & loss accounts, and cash flow statements, are audited by a qualified Chartered Accountant.
• Audit Compliance: The audit process ensures the accuracy and reliability of financial information presented to stakeholders, including shareholders, regulators, and investors.
• Auditor's Report: The Chartered Accountant issues an auditor's report, providing an opinion on whether the financial statements present a true and fair view of the NBFC's financial position and performance.

NPA Classification and Reporting

• Non-Performing Assets (NPA): NBFCs must accurately classify assets as non-performing based on RBI guidelines, which define the criteria for overdue payments and impairment.
• Periodic Reporting: NPAs must be reported periodically to the RBI through the prescribed reporting formats. This includes details of NPA accounts, provisioning made against NPAs, and recovery efforts undertaken.
• Provisioning Requirements: Adequate provisions must be made for NPAs as per RBI norms. The provisioning amount is based on the classification and age of the NPA, ensuring that the NBFC maintains adequate reserves to cover potential losses.
• Asset Quality Review (AQR): The RBI may conduct periodic asset quality reviews to assess the accuracy of NPA classification and adequacy of provisioning. NBFCs must cooperate with such reviews and address any deficiencies identified.

Other Compliances for NBFCs

Directors and Management

• Filing Returns: NBFCs must file returns with the RBI regarding any changes in directors or senior management positions. This ensures transparency and regulatory compliance in the governance structure of the NBFC.
• Fit and Proper Certification: Directors and senior management personnel of NBFCs must obtain a "fit and proper" certification from the RBI. This certification confirms that individuals appointed to key positions possess the requisite integrity, competence, and experience.

Credit Rating

• Obtaining Credit Rating: NBFCs accepting public deposits are required to obtain a credit rating from an accredited credit rating agency. This rating provides investors with an assessment of the creditworthiness and financial strength of the NBFC.
• Disclosure: The NBFC must disclose its credit rating to the public, ensuring transparency and helping investors make informed decisions about deposit placement.

Public Deposits

• Regulatory Compliance: NBFCs accepting public deposits must comply with regulations regarding the acceptance, renewal, and repayment of such deposits. These regulations are aimed at protecting the interests of depositors and ensuring the stability of the financial system.
• Deposit Insurance: NBFCs may also opt to provide deposit insurance to their depositors as an additional safeguard against default or insolvency.

Foreign Investment

• FDI Policy Adherence: If applicable, NBFCs must adhere to the Foreign Direct Investment (FDI) policy prescribed by the Government of India and the RBI. This includes compliance with sectoral caps, reporting requirements, and other regulatory norms pertaining to foreign investment in NBFCs.

Statutory Dues

• Timely Payment: NBFCs must ensure timely payment of statutory dues such as Goods and Services Tax (GST), Tax Deducted at Source (TDS), Employees' Provident Fund (EPF), etc. Failure to do so may result in penalties, interest, or other legal consequences.
• Compliance Reporting: NBFCs are also required to file periodic returns and reports with the relevant authorities to demonstrate compliance with statutory dues and obligations.

Conclusion-

In the ever-changing world of Non-Banking Financial Companies (NBFCs), adhering to regulatory compliance is not just a mere formality—it is a crucial element for fostering sustainable growth and building trust. After thoroughly examining the NBFC compliance landscape, it becomes clear that taking a proactive approach to compliance is crucial for successfully navigating the complex network of regulatory requirements.

Ensuring the necessary licences are obtained and implementing strong risk management frameworks are crucial for NBFCs to maintain compliance, uphold integrity, protect stakeholders, and foster long-term success. Nevertheless, the intricate and ever-changing regulatory mandates can present considerable obstacles for NBFCs of all sizes.

Strategic partnerships, like the one with TaxPartner, can be extremely valuable in situations like this. With our deep knowledge and experience in financial services and regulatory compliance, TaxPartner is here to provide customised solutions for NBFCs, ensuring a smooth and confident compliance journey.

With TaxPartner by your side, NBFCs can confidently navigate the complex world of compliance. Our team conducts thorough audits and offers expert guidance on regulatory changes and best practices, ensuring that you stay ahead of the curve and effectively manage compliance risks. With the help of TaxPartner's expertise and resources, NBFCs can simplify their compliance procedures, improve operational efficiency, and showcase their dedication to regulatory excellence.

Given the crucial role that NBFCs play in promoting financial inclusion and economic growth, it is essential to prioritise a culture of compliance. This goes beyond mere regulatory obligations and becomes a strategic imperative. By recognising the importance of compliance and working alongside reliable partners such as TaxPartner, NBFCs can confidently navigate the regulatory environment, leading to a stronger and more promising future for the industry.