RBI issues guidelines on risk-based internal audit for NBFCs, urban co-op banks
- All NBFCs with asset size of ₹5,000 crore and above, and all primary urban cooperative banks with asset size of ₹500 crore and above will have to migrate to the new system
The Reserve Bank of India on Wednesday issued guidelines on implementing a risk-based internal audit system by non-banking finance companies (NBFCs) and urban cooperative banks (UCBs). All Nbfcs with asset size of ₹5,000 crore and above, and all primary urban cooperative banks with asset size of ₹500 crore and above will have to migrate to the new system, the regulator said.
“The circular intends, inter alia, to provide essential requirements for a robust internal audit function, which include sufficient authority, stature, independence, resources and professional competence, so as to align these requirements in larger NBFCs/UCBs with those stipulated for Scheduled Commercial Banks,” RBI said in the circular.
According to the central bank, the Risk-Based Internal Audit (RBIA) is an audit methodology that links an organisation’s overall risk management framework. It provides an assurance to the board of directors and the senior management on the quality and effectiveness of the organisation’s internal controls, risk management and governance related systems and processes.
The RBI’s new guidelines are important in the context of risks and inconsistencies faced by systemically important NBFCs and UCBs as they adopt different audit systems.
According to the new guidelines, the boards of NBFCs and UCBs are primarily responsible for overseeing their internal audit functions.
“The RBIA policy shall be formulated with the approval of the Board and disseminated widely within the organisation. The policy shall clearly document the purpose, authority, and responsibility of the internal audit activity, with a clear demarcation of the role and expectations from Risk Management Function and Risk Based Internal Audit Function,” RBI said.
The senior management is responsible for ensuring adherence to the internal audit policy guidelines as approved by the Board and development of an effective internal control function that identifies, measures, monitors and reports all risks faced, it said.
“It shall ensure that appropriate action is taken on the internal audit findings within given timelines and status on the closure of audit reports is placed before the ACB/Board,” RBI said.
Also, the senior management is responsible for establishing a comprehensive and independent internal audit function which should promote accountability and transparency, the RBI said.
