BCA - Workshop on NBFC St Regis Hotel Palladium, Mumbai 4 August 2016

Transcription

1 NBFC - Statutory Audit aspects under Companies Act, 2013 BCA - Workshop on NBFC St Regis Hotel Palladium, Mumbai 4 August 2016

2 Agenda 1 Key aspects of audit of NBFCs 2 Laws / Regulatory Aspects 3 Accounting & Disclosure requirements 4 Auditing Aspects 5 Convergence to Ind AS - roadmap

3 Key aspects of the audit of NBFCs Determining objective and scope of the audit? Obtaining Knowledge of the business of NBFC? Consideration of Laws / Regulations governing NBFCs Determining timing and extent of Audit Procedures Robust Documentation Obtaining sufficient Audit Evidence

4 Objective and Scope of audit of NBFCs KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 4

5 Reporting requirements of Auditors of NBFCs Audit of Financial statements under Section 143 of the Companies Act, 2013) Audit of Internal Financial Controls over Financial Reporting CARO, 2016 Special Report to Board of Directors Limited Review (in case of listed companies) Exceptional Report to RBI Certificates to RBI Audit of NBFC

6 Understanding business of NBFC 3

7 Significant features of an NBFC Significant segment of Indian financial system Complimentary to the banking sector in meeting the financial needs of retail segment Also caters to unorganized business sector and small local borrowers Organizational flexibility Broadened and diversified products Regulated by Reserve Bank of India (RBI)

8 Categories of NBFC as per RBI Asset finance companies Business of financing of physical assets Investment companies Loan companies Infrastructure finance companies Mutual Benefit Finance Companies Miscellaneous Non-Banking Companies Residuary Non-Banking Companies Business of acquisition of securities Business of providing finance - loans/advances/otherwise 75% of total assets in infrastructure loans (NOF greater than Rs 300 Cr Nidhis accepting small deposits Engaged in Chit fund business Taps public savings by operating various deposit schemes

9 RBI classification of NBFC NBFC Non-Public deposit taking (NBFC - ND) Public deposit taking (NBFC - D) Significantly Important (NBFC ND-SI) Non Significantly important (NBFC ND-NSI)

10 Operating aspects of NBFCs Borrowing operations Deposits from public Bank finance (cash credit, term loans, commercial papers, FCNR loans) Debentures (Secured, private placement basis) Securitisation and assignment (selling of receivables) Funding operations Asset based funding Vehicle finance, Plant and machinery Consumer durables Mortgage loan on property Cash flow based funding Bills discounting, Personal loans, inter corporate loans

11 Laws / Regulatory aspects 3

12 Significant laws / regulations applicable to NBFC Laws and regulations ICAI pronouncements Reserve Bank of India Act NBFC Master circulars/notification/directions Companies Act Technical guide on audit of NBFCs Standards on auditing Income Tax Act Others regulations Accounting standards

13 Key Regulatory aspects (1/2) Mandatory Registration Capital adequacy norms atleast 15% Opening Branches and Offices Minimum NOF Rs. 50 Cr & rating AA Credit rating Minimum Investment grade for accepting Public deposits Public deposits Minimum credit rating except AFC Demand deposits non permitted Period of Deposit months / Rate of interest can t exceed 12.5% Brokerage & other expense should be within 2% & 0.5%, respectively Ceiling on Public deposits based on credit rating / NOF Maintenance of liquid assets atleast 15% of Public deposit in unencumbered approved securities

14 Key Regulatory aspects (2/2) Prohibition on lending against own shares Restriction on lending and investments (Single / Group borrower limits) Activity Limit - single borrower (% of Owned fund) Limit - group borrower (% of Owned fund) Max Loan/Investment 15% 25% Max Loan and Investment 25% 40% Income recognition and Asset classification Asset liability management Creation of Reserve fund 20% of net profit Submission of documents / returns / information with RBI KYC guidelines Customer identification & ceiling on cash transactions

15 Accounting & Disclosure requirements 3

16 Accounting aspects - Framework Accounting framework of NBFCs Accounting Standards prescribed under Companies Act, 2013 (To the extent not consistent with RBI directions NBFC Prudential norms prescribed by RBI Key Accounting standards relevant to NBFCs AS 9 - Revenue Recognition finance charges / EMIs / Interest AS 19 Leases AS 13 Accounting of Investments Applicability of RBI guidelines key accounting matters Income recognition in respect of Non performing assets Classification of loan assets standard/ sub standard/ doubtful and loss assets General loan loss provisioning Statutory reserves

17 Accounting aspects Non Performing Loans (NPAs) NPA classification as per RBI requirement * Lease rentals # Hire purchase Non performing assets Sub-standard - Assets as NPA Loan asset to become NPA if overdue LR* and HP # to become NPA if overdue for a period not exceeding Doubtful - Assets have remained Sub- standard for a period exceeding 31 March months 6 months 14 months >14 months 31 March months 3 months 12 months >12 months

18 Accounting aspects Minimum Provisioning requirements Minimum provisioning as per RBI requirement Provisioning requirements Substandard 10% of outstanding Doubtful Loss assets 100% of outstanding Secured: Upto 1 year- 20% 1 to 3 years 30% >3 years- 50% Unsecured: 100% of outstanding Standard assets 0.35% as at 31 March 2017 and 0.40% as at 31 March 2018

19 Disclosures in financial statements NBFC related specific disclosures: Loans and advances related - Concentration of Advances and NPAs - Movement in NPA - NPA purchased/sold - Restructured accounts disclosure - Exposures to real estate and capital market - Securitization and assignment - Financial asset sold to SC/RC for asset reconstruction - Financing of parent company products Investments Gross/provision/Net balances & movement in provision Borrowings - Concentration of Deposits Derivatives and risk exposures (Quantitative & Qualitative)

20 Disclosures in financial statements NBFC related specific disclosures: Others Capital adequacy (CRAR) SBL / GBL compliances Additional disclosures as per para 13 of NBFC (Non deposit accepting or holding) companies prudential norms (Reserve Bank) Directions, 2007 Maturity pattern of assets and liabilities Ratings assigned by credit rating agencies Registration obtained from other financial sector regulators Penalties imposed by RBI and other regulators Customer complaints

21 Auditing Aspects of NBFCs 3

22 Audit Approach Understanding the entity / Governance structure of the entity Compliance with laws and regulations Assessment of Entity level Controls / Process level controls and Risk assessment Assessment of IT control environment Non Performing advances (NPA assessment, classification and reporting / Restructuring / evergreening of loans) Financing / Borrowings / Investments Disclosure requirements (SEBI / Companies Act / RBI) Assessment of Fraud risk and its impact on audit approach

23 Auditors responsibility Regulatory and compliance matters Validity of registration with RBI Maintaining minimum NOF/ minimum capital adequacy Compliance with Prudential norms on income recognition, asset classification and provisioning Compliance with RBI guidelines on deposit acceptance KYC / ALM norms Asset liability management (formation of committee, Study the findings of the committee) Fair practices code (application for loans and their processing, Loan appraisal, disbursement terms and condition, repossession of assets etc) Exposure Limits of credit or investment Frauds Compliance with RBI requirement / Special reporting to BOD / CARO reporting Review of the RBI Inspection report

24 Auditor responsibility (1 / 5) Financing operations Compliance with credit policy for sanction of loans Detailed verification of complete documentation based on nature of transaction and legal status of borrower Security creation of security and payment of appropriate stamp duty Adherence to fair practice code Verification of systems and procedures for recording / registering charges Correctness of computation of interest / finance charges Appropriateness of systems / applications controls employed Internal controls over cash receipts Verification of the system of inspecting the physical assets Method of recording repossessed assets and their disposal

25 Auditor responsibility (2 / 5) Non performing assets Examination of classification of NPA NPA upgradation check compliance with conditions to be satisfied Adequacy of provisions against sub-standard, doubtful and loss assets Verify the provision is separately disclosed in the Balance Sheet Alertness of ever greening of loans Restructuring of loans Income tax considerations (NPA provision is not allowed while computation of total income)

26 Auditor responsibility (3 / 5) Borrowings - Deposits Compliance with RBI Directions in respect of acceptance and repayment of public deposits Internal controls over recording public deposits and repayments Accuracy of interest provision as per the rates agreed Compliance with with-holding tax laws Borrowings Banks and Institutional borrowings Verification of relevant documents for classification as secured / unsecured Accuracy of interest provision as per the rates agreed Review of Internal controls over borrowings Review of disclosure of borrowings as per Companies Act and other accounting pronouncements Registration of charges with ROC CARO implication: End use of borrowings Funds raised for short term purpose have not been utilised for long term investment

27 Auditor responsibility (4 / 5) Investments Verification of classification and related requirements disclosure, valuation, provision for diminution Ensure compliance with RBI Directions: Investment policy should be framed by the Board Investment policy should spell the criteria Verification of sale / purchase / inter class transfer of investments Appropriate disclosure for investments pledged Ensure that the investments are held in the name of the Company

28 Auditor responsibility (5 / 5) Other matters Review of Minutes of Board / audit committee Understanding of systems audit and internal audit Compliance with direct and indirect tax laws

29 Typical accounting / disclosure matters 3

30 Typical accounting / disclosure matters Impairment of loans Collateral valuation CAPAD computation Processing fees ELN valuation Cash flow disclosure NPA provision disclosure

31 Special Report to the Board of Directors Specific matters to be reported to the Board of Directors under RBI Directions: Continuance of NBFI business and COR compliance Eligibility to hold COR Correctness of classification of Asset Finance Company Correctness of classification of Micro Finance Institution Additional clauses for Non-Deposit taking NBFC Ensure passing of Board resolution for non-acceptance of public deposit Verify if any public deposits accepted during the year Status of Compliance with prudential norms Verification of computation of CRAR and filing of NBS 7 return within the due date

32 Special Report to the Board of Directors Additional clauses for Deposit taking NBFC Public deposit related Public deposits and other borrowings are within admissible limits Regularisation of excess of public limits Minimum investment grade rating obtained Aggregate amount of deposit within the limits specified by Rating agency Any default in paying to depositors after interest/principle is due NOF between 25 lakh and 2 crores having deposit in excess of permissible limits Frozen the level of deposits Brought down level of deposits to level of revised ceiling in terms of notification Other RBI compliances Correctness of CAPAD ratio Compliance with RBI prudential norms Ensure compliance with liquid assets requirement Return of deposit (NBS 1) and half yearly return filed within due dates Compliance with prudential norms on opening of new branches / closure of existing branches

33 Convergence to Ind AS Roadmap 3

34 IFRS convergence: A quick recap Previous plan 1 April 2011 Finance minister s speech in July 2014 January 2015 press release on revised roadmap issued by the MCA; phase wise implementation proposed While voluntary early adoption is possible for other companies, it is not permitted for banks, NBFCs and insurance companies Banks, NBFCs and Insurance companies will apply Ind AS from with comparatives for February 2015 roadmap for transition to Ind AS notified and 39 converged (final) standards issued

35 Why is it important to start now? Business Impact The adoption of Ind AS will change how business is managed and the sooner the Company can evaluate the economic effects on the business, the sooner it can take appropriate decisions. Business impact is relevant for your business, in order to understand the changes in the financial statements. Early update of market communication The adoption of Ind AS, especially Ind AS 109 will change what entities communicate with their stakeholders (i.e. impact on P&L volatility and other KPIs). Interdependencies to the Finance / ITinitiative Interdependencies and interactions with other Finance/IT initiatives will have to be carefully evaluated and planned in advance. Impact on processes and systems Some complex accounting issues may require an appropriate time to take decisions and find solutions. The impact on business processes and IT systems will have to be carefully evaluated and planned in advance Complexity and group wide adoption All group entities will adopt Ind AS for internal and/ or external reporting and therefore need sufficient time to implement which requires an early start to help ensure clear and timely guidelines, including the IT architecture and the main organizational decisions. First time adoption Starting early will help the Company to evaluate the different options available to it with respect to adoption of Ind AS

36 Practical challenges Skill-sets Judgment Fair Value Group Transition Data Capture IFRS Updates All stakeholders to be conversant with Ind AS end objective to prepare and use/ interpret Ind AS financial statements for regular reporting Application of management judgment in accounting policies, evaluation of options under Ind AS will put additional burden on entities Extensive use of fair value measurements in areas such as financial instruments and business combinations Ind AS compliant data requirements from subsidiary, joint ventures and associates for consolidation purposes Changes in recognition and measurement criteria & extensive disclosure requirements need redesigning of accounting systems Ind AS itself is evolving, leading to constant updates and changes in existing standards to provide timely information Companies are responding in the following ways Training personnel Setting up frameworks and Using the work of experts specializing Using a recognised structured approach Modifying the reporting systems Regular IFRS updates / Ind AS accessing data in fair valuation for transition

37 Q&A 38

38 Thank you Manoj Kumar Vijai Mobile