RBI unveils internal audit mechanism for select NBFCs, co-operatives

NEW DELHI:  The Reserve Bank of India (RBI) on Wednesday unveiled risk-based internal audit (RBIA) system for select NBFCs and urban co-operative banks. Deposit-taking NBFCs and the ones with an asset size over Rs 5,000 crore, and urban co-operatives banks with assets of over Rs 500 crore will have to migrate to the new system. 

According to RBI, an effective RBIA is an audit methodology that links an organisation’s overall risk management framework and provides an assurance to the Board of Directors and the Senior Management on the quality and effectiveness of the organisation’s internal controls, risk management and governance related systems

It added that the internal audit function should broadly assess and contribute to the overall improvement of the organization’s governance, risk management, and control processes using a systematic and disciplined approach. The function is an integral part of sound corporate  governance and is considered as the third line of defence, said RBI.

Historically, the internal audit system in NBFCs/UCBs has generally been concentrating  on transaction testing, testing of accuracy and reliability of accounting records and financial reports, adherence to legal and regulatory requirements, etc. However, in the changing  scenario, such testing by itself might not be sufficient.