RBI extends risk-based internal audit system to HFCs
In February of this year, the RBI had issued a circular ordering the RBIA framework for certain non-bank financial companies (NBFC) and urban cooperative banks by March 31, 2022.
On Friday, the RBI, through a circular, extended the provisions issued for NBFCs to housing finance companies (HFCs) as well.
The provisions will apply to all deposit-taking HFCs, regardless of their size, as well as non-deposit-taking HFCs with an asset size of Rs 5,000 crore or more, the central bank said.
These HFCs have been asked to implement an RBIA framework by June 30, 2022.
An effective RBIA is an audit methodology that links the general aspects of an organization. Risk management frame and provides a guarantee to the Board of Directors and senior management on the quality and effectiveness of internal controls, risk management, and systems and processes related to the governance of the organization.
According to the February RBI circular, the internal audit function should comprehensively assess and contribute to the overall improvement of the organization’s governance, risk management and control processes through a systematic and disciplined approach.
The function is an integral part of sound corporate governance and is seen as the third line of defense, he had said.
Historically, the NBFC / UCB internal audit system has generally focused on transaction testing, accuracy and reliability testing of accounting records and financial reports, compliance with legal and regulatory requirements, which may not be enough in a changing scenario.
A shift to a framework that focuses on assessing risk management systems and control procedures in various areas of operations, in addition to transaction testing, will help anticipate areas of potential risks and mitigate those risks, said the central bank.
In February the Reserve Bank of India had said that all NBFC that accept deposits; all NBFCs that do not accept deposits with an asset size of Rs 5,000 crore or more; and all UCBs with an asset size of Rs 500 crore or more will have to implement the RBIA framework by March 31, 2022.