Chapter 14 Unit 2: NBFC Audit (Scale-Based Regulation SBR)
1. Registration Criteria & The 50-50 Principal Business Test
Under Section 45-IA of RBI Act 1934, every NBFC must obtain a Certificate of Registration (CoR) and maintain minimum Net Owned Funds (NOF) (glide path up to ₹10 Crore).
A company is treated as an NBFC if it satisfies BOTH conditions:
1. Financial Assets Test: Financial assets constitute more than 50% of total assets.
2. Financial Income Test: Income from financial assets constitutes more than 50% of total gross income.
2. RBI Scale-Based Regulation (SBR) Framework
RBI regulates NBFCs based on systemic significance through a 4-tiered structure:
| SBR Layer | Categories of NBFCs Included | Key Regulatory Tightness |
|---|---|---|
| 1. Base Layer (NBFC-BL) | • Non-deposit taking NBFCs with asset size < ₹ 1,000 Crore. • NBFC-P2P (Peer-to-Peer), Account Aggregators (AA), NOFHC. |
Basic prudential norms; NOF target ₹10 Cr; simplified governance. |
| 2. Middle Layer (NBFC-ML) | • ALL Deposit-taking NBFCs (NBFC-D) regardless of asset size. • Non-deposit NBFCs with asset size ≥ ₹ 1,000 Crore. • Primary Dealers, Core Investment Companies (CICs), HFCs, Infrastructure Debt Funds (IDF). |
Stricter capital adequacy, board committees mandatory (Audit, NRC, Risk Mgmt). |
| 3. Upper Layer (NBFC-UL) | • Top 10 NBFCs identified by RBI based on quantitative & qualitative scoring methodology. • Always includes top NBFCs in asset size. |
Bank-like regulatory intensity, mandatory listing within 3 years, Common Equity Tier 1 (CET1) 9%. |
| 4. Top Layer (NBFC-TL) | • Empty by default. • Activated by RBI if an NBFC-UL exhibits extreme systemic risk spillover. |
Higher capital add-ons, intense regulatory surveillance. |
3. Asset Classification & Provisioning Norms
NPA recognition for NBFCs across all layers is now harmonized to > 90 days overdue (replacing the old 180-day norm).
| Asset Class | Overdue Period | Standard Provision |
|---|---|---|
| Standard Assets | Regular servicing / ≤ 90 days | 0.40% of total outstanding |
| Sub-Standard | NPA for ≤ 12 months | 10% (Ind AS: ECL based) |
| Doubtful | NPA for > 12 months | • Up to 1 yr (D1): 20% secured, 100% unsecured • 1 to 3 yrs (D2): 30% secured, 100% unsecured • > 3 yrs (D3): 50% secured, 100% unsecured |
| Loss Assets | Identified as uncollectible | 100% write-off or provision |
4. NBFC Auditor's Report & Exception Reporting to RBI
Under the NBFC Auditor's Report (Reserve Bank) Directions, 2016, if the auditor observes that the NBFC:
1. Has not obtained CoR or is not entitled to hold CoR;
2. Fails to meet NOF criteria;
3. Has failed to comply with Prudential Norms on capital adequacy, asset classification, or provisioning;
The auditor has a statutory duty to send an exception report directly to the Reserve Bank of India (RBI) within 7 days of noticing the violation, irrespective of whether management agrees.