Audit of NBFC
14B.1 – Basics of NBFC
Meaning of NBFC
A company whose principal business is of financial activity is classified as NBFC. Financial activity will be considered as principal business if:
Financial assets constitute > 50% of total assets (netted off by intangible assets) & income from financial assets constitute > 50% of gross income.
Registration & regulation of NBFC
Sec. 45-IA: No NBFC is allowed to commence or carry on business of NBFC without:
(a) obtaining CoR issued by RBI; and (b) having NOF, as notified by RBI.
NBFCs Current NOF By 31.03.25 By 31.03.27
NBFC-P2P, NBFCAA & NBFC not availing public funds & not having any customer interface 2
NBFC-IFC & IDF 300 Cr. 300 Cr. 300 Cr.
NBFC-ICC 2 Cr. 5 Cr.
NBFC-Factor
Regn. is required where financing activity is principal business.
To obviate dual regulation, certain NBFC which are regulated by other regulators are exempted from requirement of regn.
Types of NBFC
(a) Investment and Credit Company (ICC).
(b) Infrastructure Finance Company.
(c) Systemically Important Core Investment Company.
(d) Infrastructure debt Fund-NBFC.
(e) NBFC-Micro Finance Institution.
(f) Non-Banking Financial Company – Factors.
(g) Non-Operative Financial Holding Company.
Scale Based Regulation
Base Layer shall comprise of:
(a) non-deposit taking NBFCs below asset size of ₹ 1000 crore & (b) NBFCs undertaking following activities:
(i) NBFC-Peer to Peer Lending Platform (NBFC-P2P),
(ii) NBFC-Account Aggregator (NBFC-AA),
(iii) Non-Operative Financial Holding Company (NOFHC) & (iv) NBFCs not availing public funds & not having any customer interface.
Middle Layer shall consist of:
(a) all deposit taking NBFCs (NBFC-Ds), irrespective of asset size;
(b) non-deposit taking NBFCs with asset size of > ₹ 1000 crore; &
(c) NBFCs undertaking following activities:
(i) Standalone Primary Dealers (SPDs), (ii) Infrastructure Debt Fund - NBFC (IDF-NBFCs), (iii) Core Investment Companies (CICs), (iv) Housing Finance Companies (HFCs) and (v) Infrastructure Finance Companies (NBFC-IFCs).
Upper Layer shall comprise of those NBFCs which are specifically identified by the RBI as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology.
Top 10 eligible NBFCs in terms of their asset size shall always reside in upper layer, irrespective of any other factor.
Top Layer will ideally remain empty.
This layer can get populated if RBI is of opinion that there is a substantial increase in potential systemic risk from specific NBFCs in Upper Layer.
Such NBFCs shall move to Top Layer from Upper Layer
Categorisation of NBFCs carrying out specific activity
(a) NBFC-P2P, NBFC-AA, NOFHC and NBFCs without public funds & customer interface will always remain in Base Layer.
(b) NBFC-D, CIC, IFC & HFC will be included in Middle Layer or Upper Layer (and not in Base layer), as the case may be. SPD & IDF-NBFC will always remain in Middle Layer.
(c) Remaining NBFCs, viz., NBFC-ICC, NBFC-MFI, NBFC-Factors & NBFC-MGC could lie in any of layers depending on parameters of scale based regulatory framework.
(d) Govt. owned NBFCs shall be placed in Base or Middle Layer. They will not be placed in Upper Layer till further notice.
Provisionin
Prudential Norms
Maintain capital ratio consisting of Tier I & Tier II capital of its aggregate risk weighted assets on-balance sheet & of risk adjusted value of off-balance sheet items > 15%.
Tier I Capital > 10%; NBFCs engaged in lending against gold jewellery shall maintain Tier I capital > 12%
Tier I Capital: comprises of:
(1) Owned fund as reduced by inv. in shares of other NBFCs & in shares, deb., bonds, o/s loans & advances including HP & lease finance made to & deposits with subsidiaries & companies in same group > 10% of owned fund; and
(2) Perpetual debt inst. issued by non-deposit taking NBFCs to the extent it does not exceed 15% of aggregate Tier 1 capital of such company as on March 31 of PY.
Tier II Capital: comprises of:
(1) Preference shares other than those which are compulsorily convertible into equity;
(2) Rev. reserves at discounted rate of 55%;
(3) General provisions (including that for Std. Assets) & loss reserves to the extent not attributable to actual diminution in value or identifiable potential loss in any specific asset & are available to meet unexpected losses, to the extent of 1.25% of risk weighted assets;
(4) Hybrid debt capital instruments;
(5) Subordinated debt; and
(6) PDI issued by non-deposit taking NBFC which is in excess of what qualifies for Tier 1 capital; to the extent it does not exceed Tier 1 capital.
Note: NBFCs-BL are not eligible to include PDI (Tier I as well as Tier II).
Based on recognised accounting principles.
NPA - income including interest/discount/ hire charges etc. shall be recognised only when actually realised.
Income recognised before asset became NPA & remaining unrealised shall be reversed.
(a) Asset, in respect of which, interest remained overdue for > 180/90 days*;
(b) Term loan inclusive of unpaid interest , when instalment is overdue for > 180/90 days* or on which interest amount remained overdue for 180/90 days*;
(c) demand or call loan, which remained overdue for > 180/90 days* from date of demand or call or on which interest amount remained overdue for > 180/90 days*;
(d) bill which remains overdue > 180/90 days*;
(e) interest in respect of a debt or income on receivables under head ‘other current assets’ in nature of short-term advances, which facility remained overdue for > 180/90 days*;
(f) any dues of sale of assets or services rendered or reimbursement of expenses incurred, which remained overdue for > 180/90 days*;
(g) lease rental & hire purchase instalment, which has become overdue for a period of >180/90 days*.
*180 days (In case of NBFC-BL); 90 days (In case of Other NBFCs)
Note: Period of more than 180 days for NPA classification shall be adjusted as per glide path outlined below: NPA Norms Timeline
>150 days overdue By March 31, 2024
>120 days overdue By March 31, 2025
> 90 days By March 31, 2026
g Standard Assets – 0.40%; Sub-Standard Assets – 10%
Doubtful Assets: Unsecured portion - 100%;
Secured Portion – 20% (1 year), 30% (1-3 years), 50% (>3 years).
Loss Assets – 100%.
Aspects of Audit Procedure
Ascertain business of NBFC
Evaluation of I.C. System
Study: MOA & AOA; Business Policies; Minutes of Board/Committee meetings
Examine whether IC exist, effective & continued.
Review effectiveness of system of recovery & periodical review of advances.
Registration Obtain a copy of certificate of regn. granted by RBI.
Public Deposit Directions
1. Credit Rating: Obtain copy of credit rating assigned to NBFC.
2. Interest & Brokerage payments: To ensure that it is not paid in excess.
3. Written application: Ensure that deposits has accepted with written application.
4. Deposit register: Examine that correct particular entered in register.
5. Custody of investments: Obtain certificate that investments are kept in safe custody.
6. Filing of annual return: Annual Return is filed in specified time.
7. Board Resolution in case of nonacceptance of deposits
Change of credit rating
In event of downgrading of credit rating, NBFC have to reduce its public deposits in accordance with revised credit rating within specified time frame & informed same to RBI in writing.
If credit rating of Investment Credit Company (ICC) is downgraded below minimum specified investment grade , ICC, shall regularise excess deposit as below:
(a) with immediate effect, stop accepting fresh public deposits & renewing existing deposits;
(b) all existing deposits shall run off to maturity; and
(c) report position within 15 working days, to Regional Office of RBI where NBFC is registered.
1. Verification of compliance of prudential norms w.r.t.
Income recognition
Income from investments
Asset classification
Capital Adequacy norms
Granting loan against own shares
Norms for concentration of credit
2. Policy for granting Demand loans: has been framed by BOD.
3. Classification of advances: has been made in accordance with directions.
4. Income from NPA: Ensure that income from NPA has not been recognized.
5. Recovery from NPA: Check recovery made in NPAs account.
Prudential Norms
No.
(i) Cash and bank balances including fixed deposits and certificates of deposits with banks 0
(ii) Investments:
1. Approved securities [Except at (3) below]
2. Bonds of public sector banks
3. Fixed deposits/certificates of deposits/bonds of public financial institutions
4. Shares of all companies and debentures / bonds/ commercial papers of all companies and units of all mutual funds
5. All assets covering PPP and post commercial operations date (COD) infrastructure projects in existence over a year of commercial operation
(iii) Current assets/Other Financial Assets:
1. Stock on hire (net book value)
2. Intercorporate loans/deposits
3. Loans and advances fully secured against deposits held
4. Loans to staff
5. Other secured loans and advances considered good Consumer credit exposure (outstanding as well as new) categorised as retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans
Credit Card Receivables [Except at (6) below]
6. Bills purchased/discounted
7. Others (To be specified)
(iv) Fixed Assets (net of depreciation):
1. Assets leased out (net book value)
2. Premises 3. Furniture & Fixture
(v) Other assets:
1. Income tax deducted at source (net of provision)
2. Advance tax paid (net of provision)
3.
4.
(vi) Domestic Sovereign:
1. Fund based claims on the Central Government
2. Direct loan / credit / overdraft exposure and investment in State Government securities
3. Central Government guaranteed claims
4. State Government guaranteed claims, which have not remained in default / which are in default for a period not more than 90 days
5. State Government guaranteed claims, which have remained in default for a period of more than 90 days
14B.3 – Master Direction – Monitoring of Frauds
Classification of Frauds
In order to have uniformity in reporting, frauds have been classified as under based mainly on provisions of IPC:
(a) Misappropriation and criminal breach of trust
(b) Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts.
(c) Unauthorised credit facilities extended for reward or for illegal gratification.
(d) Negligence and cash shortages (Only if the intention to cheat/defraud is suspected/proved). If fraudulent intention is not suspected/proved, at the time of detection, cases of negligence and cash shortage will be treated as fraud and reported, if: Cash shortages are more than ₹ 10,000; and Cash shortages are more than ₹ 5,000 and detected by management/auditor/inspecting officer and not reported on the occurrence by the persons handling cash
(e) Cheating and forgery
(f) Irregularities in foreign exchange transactions (only if the intention to cheat/ defraud is suspected/proved).
(g) Any other type of fraud not coming under the specific heads as above.
14B.4 – Audit Check List in case of NBFC
Investment and Credit Company
Points related to investment
Physical Verification: Physically verify securities held by NBFC. If any security is lodged with institution or bank, certificate from bank/institution to that effect must be verified.
Income recognition: Verify that dividend income has been duly received & accounted for. Dividend income on shares & units of mutual funds to be recognised on cash basis. However, NBFC has option to account for dividend income on accrual basis, if declared by body corporate in its AGM & its right to receive payment has been established.
Authorisation: Verify Board Minutes for purchase and sale of investments.
Classification: Ascertain from Board resolution or obtain mngt. certificate to the effect that investments acquired are current or Long-Term Investments.
Valuation: Check whether investments have been valued in accordance with the NBFC Prudential Norms Directions and adequate provision for fall in market value of securities, have been made.
Compliance of AS 13: Ascertain whether requirements of AS 13 “Accounting for Investments” or other AS, as applicable have been duly complied with.
External Confirmations : In respect of shares/securities held through a depository, obtain a confirmation from depository regarding shares/securities held by it on behalf of NBFC.
Points related to Credit
Sanctioning: Examine whether loan or advance has been properly sanctioned.
Security: Verify security obtained & agreements entered into, if any, with concerned parties in respect of advances given. Ascertain nature & value of security & net worth of borrower/guarantor to determine the extent to which an advance could be considered realisable.
Loan against own shares: Verify whether NBFC has not advanced any loans against the security of its own shares.
Compliance of prudential norms : Check whether NBFC has not lent/invested in excess of specified limits to any single borrower or group of borrowers as per NBFC Prudential Norms Directions.
Appraisal and follow up System : Verify whether NBFC has adequate system of proper appraisal & follow up of loans and advances.
Classification: Check classification of loans & advances into Standard, SubStandard, Doubtful and Loss Assets and adequacy of provision for bad and doubtful debts as required by NBFC Prudential Norms Directions.
NBFC – P2P
(a) Obtain understanding of business conducted by NBFC-P2P. Verify that company undertakes only permissible activities like providing online marketplace to participants for lending & borrowing. It should not be engaged in business of lending funds on its own.
(b) Verify certificate of regn. obtained from RBI.
(c) Verify adherence to lending & borrowing guidelines prescribed by RBI.
(d) Ensure compliance with reporting requirements of RBI.
(e) Verify Board approved policy setting out eligibility criteria for participants i.e. lenders and borrowers.
(f) Verify Board approved policy for pricing of services.
(g) Verify Board approved policy for grievance redressal and complaints.
(h) Verify appropriateness of arrangements entered into among participants & NBFC-P2P.
Para
NBFC accepting Public Deposits
1. Whether company has obtained a Certificate of Registration (CoR) from Bank (RBI).
2. In case company holding CoR, whether company is entitled to continue to hold CoR in terms of its asset/income pattern.
3. Whether NBFC is meeting required NOF requirement as laid down in directions issued by RBI. NBFC shall submit a Certificate from its Statutory Auditor that it is engaged in business of non -banking financial institution requiring it to hold CoR & is eligible to hold it, within 5 working days from the date of signing of the Auditor’s report & in any case not later than Dec. 30th of that year.
1. Whether public deposits accepted by the company are within admissible limits
2. Whether public deposits held in excess of permissible amount are regularised
3. Whether NBFC is accepting "public deposit” w/o minimum investment grade credit rating
4. Whether Capital Adequacy Ratio has been correctly determined.
5. Whether company has violated any restriction on acceptance of public deposit .
6. Whether company has defaulted in paying to its depositors interest and/or principal amount of deposits after it became due.
7. Whether company has complied with prudential norms on income recognition, asset classification, provisioning for bad and doubtful debts, and concentration of credit/investments.
8. Whether company has complied with liquid assets requirement as prescribed.
9. Whether company has furnished return on deposits in prescribed form (NBS 1) .
10. Whether company has furnished to the Bank within, quarterly return on prudential norms
1. Whether BOD has passed a resolution for non-acceptance of any public deposits
2. Whether company has accepted any public deposits during the relevant period/year
NBFC not accepting public deposits
4 Reasons to be stated for unfavourable or qualified statements
3. Whether company has complied with the prudential norms relating to income recognition, asset classification and provisioning for bad and doubtful debts.
4. (a) whether capital adequacy ratio as disclosed in return submitted to the Bank in Form NBS7, has been correctly arrived at; and (b) whether company has furnished to Bank, annual statement of capital funds, risk asset ratio within stipulated period.
5. Whether NBFC has been correctly classified as NBFC Micro Finance Institution
Where, in auditor’s report, statement regarding any of items referred to in Paragraph 3 is unfavourable or qualified, auditor’s report shall also state reasons for such unfavourable or qualified statement, as the case may be.
Where statement regarding any of items referred to in Para 3, is unfavorable or qualified, or in opinion of the auditor the company has not complied with:
(a) Provisions of Chapter III B of Reserve Bank of India Act, 1934; or
(b) NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
5 Exception Report
(c) Master Direction – Reserve Bank of India (NBFC – Scale Based Regulations) Directions, 2023,
Where auditor is unable to express any opinion on any of items referred to in Paragraph 3, his report shall indicate such fact together with reasons therefore. Para
it shall be obligation of auditor to make a report containing details of such unfavourable/qualified statements and non-compliance in respect of company to concerned Regional Office of Department of Non-Banking Supervision of Bank under whose jurisdiction regd. office of company is located.
– Applicability of Ind-AS on NBFC
NBFCs are required to comply with Ind AS as under:
(i) Accounting periods beginning 1 April 2018 : Listed & unlisted NBFCs having a net worth of > ₹ 500 crore and holding, subsidiary, JV or associate companies of such NBFCs;
(ii) Accounting periods beginning 1 April 2019 : All other listed NBFCs, unlisted NBFCs having net worth of > ₹ 250 crore but < ₹ 500 crore and holding, subsidiary, JV or associate companies of such NBFCs.
Reporting Requirement
Compliance with CARO – Para 3 (xvi)
(a) Whether company is required to be regd. u/s 45-IA of RBI Act, 1934 and if so, whether registration has been obtained;
(b) Whether company has conducted any Non-Banking Financial or Housing Finance activities without valid Certificate of Registration (CoR) from RBI;
(c) Whether company is a Core Investment Company (CIC) as defined in RBI regulations, if so, whether it continues to fulfil criteria of CIC , & in case company is an exempted or unregistered CIC, whether it continues to fulfil such criteria;
(d) Whether Group has more than one CIC as part of Group, if yes, indicate number of CICs which are part of the Group.
Related Provisions
Sec. 45-IA of RBI Act, 1934 provides that no NBFC is allowed to commence or carry on business of a NBFC without obtaining a CoR from RBI Registration is required if financing activity is a principal business of company. Financial activity will be considered as principal business if company’s financial assets constitute > 50% of total assets & income from financial assets constitute > 50% of gross income. This test is popularly known as 50-50 test.
Audit Procedure and Reporting
(i) Examine transactions of company to determine whether it is engaged in financial activity.
(ii) Examine F.S. to ascertain whether financial assets constitute > 50% of total assets & income from such assets constitute > 50% of gross income.
(iii) Ascertain whether NOF of company exceed such amount so as to require company to get itself registered as NBFC with RBI.
(iv) Ascertain whether company has obtained registration as NBFC, if not, reasons should be sought from management and documented.
(v) Auditor’s Report under CARO shall incorporate the following: Whether registration is required u/s 45-IA of the RBI Act, 1934. If so, whether it has obtained the registration. If registration not obtained, reasons thereof.
Schedule III
Meaning of Core Investment Company
NBFC carrying on business of acquisition of shares & securities & satisfies following conditions as on last audited B/S:
(i) holds > 90% of net assets in form of investment in equity shares, preference shares, bonds, deb. or debt in group companies;
(ii) its equity investments in in group companies and units of Infrastructure Investment Trust only as sponsor constitute > 60% of its net assets;
(iii) it does not trade in its investments in shares, bonds, deb., debt or loans in group companies except through block sale for purpose of dilution or disinvestment;
(iv) it does not carry on any other financial activity.
Division of Schedule III
Schedule III to Companies Act, 2013 has been divided into three divisions: Division I deal with F.S. for a company whose F.S. are required to comply with Companies (AS) Rules, 2006 Division II deals with F.S. for a company whose F.S. are drawn up in compliance of the Companies (Ind AS) Rules, 2015 Division III deals with F.S. for a NBFC whose F.S. are drawn up in compliance of the Companies (Ind AS) Rules, 2015 Differences between Division II and Division III
Presentation requirements under Division III for NBFCs are similar to Division II (Non-NBFC) to a large extent, except:
(a) NBFCs have been allowed to present items of B/S in order of their liquidity which is not allowed to companies required to follow Division II. Additionally, NBFCs are required to classify items of B/S into financial & nonfinancial whereas other companies are required to classify the items into current and non-current.
(b) An NBFC is required to separately disclose by way of a note any item of ‘other income’ or ‘other expenditure’ which > 1% of total income. Division II, on the other hand, requires disclosure for any item of income or expenditure which > 1% of the revenue from operations or ₹ 10 lakhs, whichever is higher.
(c) NBFCs are required to separately disclose under ‘receivables’, debts due from any LLP in which its director is a partner or member
(d) NBFCs are also required to disclose items comprising ‘revenue from operations’ & ‘OCI’ on face of Statement of P&L instead of showing those only as part of the notes.
(e) Separate disclosure of trade receivable which have significant increase in credit risk & credit impaired .
(f) Conditions or restrictions for distribution attached to statutory reserves have to be separately disclose in notes as stipulated by the relevant statute.
Referencer for Quick Revision |
Advanced Auditing Assurance & Professional Ethics (Audit)
AUTHOR : PANKAJ GARG
PUBLISHER : TAXMANN
DATE OF PUBLICATION : NOVEMBER 2025
EDITION : 8TH EDITION
ISBN NO : 9789371261258
NO. OF PAGES : 148
BINDING TYPE : PAPERBACK
DESCRIPTION
Referencer for Quick Revision – Advanced Auditing, Assurance & Professional Ethics (Auditing) is a visual, chart-based revision guide designed for CA Final – Group I | Paper 3. It offers a complete and concise revision capsule of the ICAI syllabus through colour-coded charts, flow diagrams, and tabular summaries, updated up to 31st October 2025. With 135+ full-colour charts and tables across 19 chapters, this Referencer enables full-subject recall within 15 hours, making it indispensable for last-minute preparation.
The Present Publication is the 8th Edition for the Jan./May/Sept. 2026 Exams, authored by CA Pankaj Garg, with the following key highlights:
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• [Exam Speed] Enables complete syllabus revision in 12–15 hours
• [Structure] SA-wise | Standard-wise | Topic-wise, following ICAI’s logical flow from planning → execution → reporting
• [Colour-coded Presentation]
o Blue – Principles & Concepts
o Yellow – Amendments & Changes
o Red – Practical Notes & Exceptions
o Green – Diagrams & Definitions
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• [Notes Pages] For personalised annotations and last-minute jotting
• [Fully Updated till 31-10-2025] Includes Revised Code of Ethics (2020 & 2023), CARO 2020, Rule 11, Sec. 143(3) Reporting, Digital Audit Trail, Forensic & ESG Assurance updates