The Reserve Bank of India (RBI) is likely to engage the services of external auditors to audit majority of the 9,500-odd non-banking finance companies (NBFCs) to delve into their operations and check whether their registered office is at the place mentioned in their application for registration, among others.

Failure of certain NBFCs due to idiosyncratic factors and several digital lenders violating extant regulations and guidelines on outsourcing and Fair Practices Code may be the trigger the aforementioned audit, according to industry sources.

The RBI cancelled the certificate of registration (CoR) of 3,110 NBFCs between FY15 and FY22, with the largest number of cancellations (1,851) being in FY19. As on October 1, 2022, the CoRs of 5,451 NBFCs were cancelled by the central bank.

The proposed audit exercise could lead to cancellation of CoRs of more NBFCs in FY24.

There are 9,500-odd NBFCs but the RBI’s supervisory staff strength is only about 1,500. So, besides perusing offsite returns submitted by NBFCs, RBI may want to engage the services of external auditors to get in-depth assessment of the operations of the small and medium NBFCs, the sources said. 

“The pandemic led to a mushrooming of digital lenders as customers increasingly resorted to digital platforms for quick short-term loans. Several such NBFCs violated extant regulations and guidelines on outsourcing and Fair Practices Code (FPC) and faced cancellation of license,” according to RBI’s Report on Trend and Progress of Banking in India 2021-22.

The focus of the proposed audit could be on NBFCs in the Base Layer (under the scale based regulation) comprising non-deposit taking NBFCs below the asset size of ₹1,000 crore and NBFCs undertaking activities such as Peer-to-Peer Lending (Platform), Account Aggregator and Non-Operative Financial Holding Company.

The Reserve Bank has prescribed progressively stringent regulatory regimes for NBFCs in the Upper and Middle layers..

There are 11 types of NBFCs including Investment and Credit Company, Infrastructure Finance Company,Core Investment Company, Micro Finance Institution, Account Aggregator, Peer to Peer Lending Platform and Housing Finance Company.

In a speech in October 2021, M Rajeshwar Rao, Deputy Governor, RBI, noted that the reputation of the non-banking financial sector has been dented in recent times by failure of certain entities due to idiosyncratic factors.

“The challenge therefore is to restore trust in the sector by ensuring that few entities or activities do not generate vulnerabilities which go undetected and create shocks and give rise to systemic risk through their interlinkages with the financial system.

“Forestalling and where necessary, decisively resolving such episodes becomes a key focus of our regulatory and supervisory efforts,” he said.

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