HFCs Accrue Risk-based Internal Audit System by RBI

To upgrade the effectiveness and standard of their internal audit system, the Reserve Bank extended the risk-based internal audit (RBIA) system to select housing financing enterprises on Friday. The RBI issued a circular in February this year mandating the RBIA framework by March 31, 2022, for certain non-banking financial companies (NBFCs) and urban co-operative banks.

The RBI published a circular on Friday that extended the NBFC regulations to home finance firms (HFCs) as well. According to the central bank, the regulations would apply to all deposit-taking HFCs, regardless of their size, as well as non-deposit-taking HFCs with assets of Rs 5,000 crore and beyond. By June 30, 2022, these HFCs must have an RBIA framework in place.

The central bank stated that a transition to a framework that focuses on the examination of risk management systems and control processes in many areas of operations, in addition to transaction testing, will aid in predicting and managing possible hazards.

An effective RBIA is an audit methodology that connects an organisation's overall risk management framework and ensures the quality and effectiveness of the organization's internal controls, risk management, and governance-related systems and processes for the Board of Directors and senior management.

According to the RBI's February circular, the internal audit function should use a systematic and disciplined methodology to review and contribute to the overall development of the organization's governance, risk management, and control procedures. The Reserve Bank of India said in February that all deposit-taking NBFCs, non-deposit-taking NBFCs with assets of Rs 5,000 crore or more, and Urban Cooperative Banks with assets of Rs 500 crore or more must adopt the RBIA framework by March 31, 2022.

RBI’s circular had noted that the purpose is an important aspect of good corporate governance and is regarded as the third line of defence. Historically, the internal audit system at NBFCs/UCBs has mostly focused on transaction testing, testing of accounting records and financial reporting for correctness and dependability, and adherence to legal and regulatory standards, which may not be sufficient in a changing context.