NON BANKING FIN COS. RBI CIRCULAR

To

1. The Chairmen/CEOs of Non-Banking Financial Companies [Excluding RNBCs]

2. The President, Institute of Chartered Accountants of India

Dear Sir,

The Reserve Bank of India had issued Directions to the auditors of Non-Banking Financial

(SPT)-98 dated January 2, 1998.

The Directions have been consolidated and in supersession of said Directions viz. the Non-

Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 1998 the new

Directions are being issued vide Notification No. DNBS(PD)201/DG(VL)/2008 dated September

18, 2008 for meticulous compliance.

Yours faithfully,

(P. Krishnamurthy)

Chief General Manager In-Charge

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The Reserve Bank of India (hereinafter referred to as "the Bank"), having considered it

necessary in the public interest and for the purpose of proper assessment of books of accounts

of NBFCs, in exercise of the powers conferred by sub-section (1A) of Section 45MA of the

Reserve Bank of India Act, 1934 (Act 2 of 1934) and of all the powers enabling it in this behalf,

and in supersession of the Non-Banking Financial Companies Auditor’s Report (Reserve Bank)

Directions, 1998, issues to every auditor of every non-banking financial company, the Directions

hereinafter specified.

(i) These Directions shall be known as “Non-Banking Financial Companies Auditor’s Report

(Reserve Bank) Directions, 2008.”

(ii) These Directions shall apply to every auditor of a non-banking financial company as defined

in Section 45 I(f) of the Reserve Bank of India Act, 1934 (2 of 1934) hereinafter referred to as

non-banking financial company.

(iii) These Directions shall come into force with immediate effect.

In addition to the Report made by the auditor under Section 227 of the Companies Act, 1956 (1

of 1956) on the accounts of a non-banking financial company examined for every financial year

ending on any day on or after the commencement of these Directions, the auditor shall also

make a separate report to the Board of Directors of the Company on the matters specified in

paragraphs 3 and 4 below.

The auditor’s report on the accounts of a non-banking financial company shall include a statement on the following matters, namely: -

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I. Whether the company is engaged in the business of non-banking financial institution and

whether it has obtained a Certificate of Registration (CoR) from the Bank

II. In the case of a company holding CoR issued by the Bank, whether that company is

entitled to continue to hold such CoR in terms of its asset/income pattern as on March 31

of the applicable year.

Note: A reference in this regard is invited to paragraph 15 of the Non-Banking Financial

(Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions,

2007 in respect of deposit taking NBFCs and paragraph 15 of Non-Banking Financial

(Non- Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank)

Directions, 2007 in respect of non-deposit taking NBFCs.

III. Based on the criteria set forth by the Bank in Company Circular No. DNBS.PD. CC No. 85 /

03.02.089 /2006-07 dated December 6, 2006 for classification of NBFCs as Asset

Finance Company (AFC), whether the non-banking financial company has been correctly

classified as AFC as defined in Non-Banking Financial Companies Acceptance of Public

Deposits (Reserve Bank) Directions, 1998 with reference to the business carried on by it

during the applicable financial year.

Apart from the matters enumerated in (A) above, the auditor shall include a statement on

the following matters, namely:-

(i) Whether the public deposits accepted by the company together with other borrowings

indicated below viz;

(a) from public by issue of unsecured non-convertible debentures/bonds;

(b) from its shareholders (if it is a public limited company) and

(c) which are not excluded from the definition of ‘public deposit’ in the Non-Banking

Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions,

1998 are within the limits admissible to the company as per the provisions of the

Non-Banking Financial Companies Acceptance of Public Deposits (Reserve

Bank) Directions, 1998;

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(ii) Whether the public deposits held by the company in excess of the quantum of such deposits

permissible to it under the provisions of Non-Banking Financial Companies Acceptance of

Public Deposits (Reserve Bank) Directions, 1998 are regularised in the manner provided in the

said Directions;

(iii) Whether an Asset Finance Company having Capital to Risk Assets Ratio (CRAR) less than

15% or an Investment Company or a Loan Company as defined in paragraph 2(1)(ia), (vi) and

(viii) respectively of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve

Bank) Directions, 1998 is accepting "public deposit” without minimum investment grade credit

rating from an approved credit rating agency;

(iv) In respect of NBFCs referred to in clause (iii) above, whether the credit rating, for each of

the fixed deposits schemes that has been assigned by one of the Credit Rating Agencies listed

in Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions,

1998

(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 the such Credit Rating Agency;

(v) In case of NBFCs having Net Owned Funds of Rs 25 lakh and above but less than Rs 200

lakhs, whether the public deposit held by the companies is in excess of the quantum of such

deposit permissible to it in terms of Notification No. DNBS. 199/CGM (PK) - 2008 dated June

17, 2008 and whether such company :

(a) has frozen its level of deposits as on the date of that Notification; or

(b) has brought down its level of deposits to the level of revised ceiling of deposits in

terms of that Notification.

(vi) Whether the company has defaulted in paying to its depositors the interest and /or principal

amount of the deposits after such interest and/or principal became due;

(vii) Whether the company has complied with the prudential norms on income recognition,

accounting standards, asset classification, provisioning for bad and doubtful debts, and

concentration of credit/investments as specified in the Directions issued by the Reserve Bank of

India in terms of the Non-Banking Financial (Deposit Accepting or Holding) Companies

Prudential Norms (Reserve Bank) Directions, 2007.

(viii) Whether the capital adequacy ratio as disclosed in the return submitted to the Bank in

terms of the Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential

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Norms (Reserve Bank) Directions, 2007 has been correctly determined and whether such ratio

is in compliance with the minimum CRAR prescribed therein;

(ix) Whether the company has complied with the liquid assets requirement as prescribed by

the Bank in exercise of powers under section 45-IB of the RBI Act and whether the details of

the designated bank in which the approved securities are held is communicated to the office

concerned of the Bank in terms of NOTIFICATION NO.DNBS.172/CGM(OPA)-2003 dated July

31, 2003;

(x) Whether the company has furnished to the Bank within the stipulated period the return on

deposits as specified in the NBS 1 to the Non-Banking Financial Companies Acceptance of

Public Deposits (Reserve Bank) Directions, 1998;

(xi) Whether the company has furnished to the Bank within the stipulated period the half-yearly

return on prudential norms as specified in the Non-Banking Financial (Deposit Accepting or

Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007;

(xii) 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 contained in the Non-Banking Financial

Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998.

Apart from the aspects enumerated in (A) above, the auditor shall include a statement

on the following matters, namely: -

(i) Whether the Board of Directors has passed a resolution for non- acceptance of any public

deposits.

(ii) Whether the company has accepted any public deposits during the relevant period/year;

(iii) Whether the company has complied with the prudential norms relating to income

recognition, accounting standards, asset classification and provisioning for bad and doubtful

debts as applicable to it in terms of Non-Banking Financial (Non- Deposit Accepting or Holding)

Companies Prudential Norms (Reserve Bank) Directions, 2007.

(iv) In respect of Systemically Important Non-deposit taking NBFCs as defined in paragraph

2(1)(xix) of the Non-Banking Financial (Non- Deposit Accepting or Holding) Companies

Prudential Norms (Reserve Bank) Directions, 2007

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(a) whether the capital adequacy ratio as disclosed in the return submitted to the Bank in

form NBS- 7, has been correctly arrived at and whether such ratio is in compliance

with the minimum CRAR prescribed by the Bank;

(b) whether the company has furnished to the Bank the annual statement of capital

funds, risk assets/exposures and risk asset ratio (NBS-7) within the stipulated period.

Apart from the matters enumerated in (A)(I) above, the auditor shall include a statement on the

following matters, namely:

hold CoR from the Bank whether the company is complying with the conditions

stipulated as advised by the Bank.

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 also state the reasons

for such unfavourable or qualified statement, as the case may be. 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 therefor.

(I) Where, in the case of a non-banking financial company, the statement regarding any of the

items referred to in paragraph 3 above, 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 (Act 2 of 1934);

or

(b) the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve

Bank) Directions, 1998; or

(c) Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential

Norms (Reserve Bank) Directions, 2007; or

(d) Non-Banking Financial (Non- Deposit Accepting or Holding) Companies Prudential

Norms (Reserve Bank) Directions, 2007;

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it shall be the obligation of the auditor to make a report containing the details of such

unfavourable or qualified statements and/or about the non-compliance, as the case may be, 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

as per Second Schedule to the Non-Banking Financial Companies Acceptance of Public

Deposits (Reserve Bank) Directions, 1998.

(II) The duty of the Auditor under sub-paragraph (I) shall be to report only the contraventions of

the provisions of RBI Act, 1934, and Directions, Guidelines, instructions referred to in subparagraph

(1) and such report shall not contain any statement with respect to compliance of any

of those provisions.

The Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 1998 shall

stand repealed by these Directions.

Notwithstanding such repeal,

(a) any action taken, purported to have been taken or initiated under the Directions

hereby repealed shall, continue to be governed by the provisions of said Directions

(b) any reference in other Notifications issued by the Bank containing reference to the

said repealed Directions, shall mean reference to these Directions, namely, Non-

Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008 after

the date of repeal.

(V. Leeladhar)

DEPUTY GOVERNOR