MUMBAI, July 19: The Reserve Bank of India has formulated a three-tier supervisory framework to regulate non-banking finance companies (NBFCs). The three tiers are off-site monitoring, on-site inspection and extensive external audits.

The main thrust of supervision of NBFCs will be through an appropriate mechanism of off-site monitoring, Reserve Bank governor C Rangarajan said on Saturday. The central bank has also drafted a new manual for on-site inspections of NBFCs.

Rangarajan was delivering the inaugural address at the conference of officers in charge of the financial companies wing of the department of supervision (DoS) of the central bank here.

Based on the recommendations of the Shah and Khanna committees, the Reserve Bank has decided to expand the role of the auditors in the supervision of NBFCs. "In view of the urgent needs to carry out inspections of some of the NBFCs, a proposal is under consideration to engage firms of chartered accountants to carry out a round of special examination of these NBFCs" said the governor. The reports will be further examined and scrutinised by the department of supervision and the auditors will be used only as special vehicles, he clarified.

Highlighting the salient features of off-site supervision, Rangarajan said the formats of the annual returns have been revised to provide for data on core assets and income of a company. Moreover, these returns would now have to be certified by auditors of the NBFC, Rangarajan said. The Reserve Bank has already directed the large companies with an asset size of over Rs 100 crore to furnish an annual return giving the comparative position of their operational data for three years highlighting certain balance sheet items, profit and loss accounts and key ratios.

Moreover, all registered finance companies will now require to furnish a half-yearly return on prudential norms, certified by their auditors. An analysis of these these returns "may trigger off on-site inspections of some of the companies," the RBI release said.

"It is recognised that the receipt of returns and their prompt and effective scrutiny would be the means to exercise effective off-site surveillance over the NBFCs," he said. The RBI will soon appoint an information technology firm to develop an software package since a system of computer processing and analysis of the data is imperative to check the financial health of the NBFCs.

On on-site inspection, he said periodic inspections will be carried out on large NBFCs and others "whose off-site monitoring throws up signals of unhealthy financial position or non-compliance with the prudential norms". The inspection will focus on quality of assets and compliance with the regulatory and supervisory stipulations.

Admitting that the returns and balance sheets of NBFCs at present do not help the central bank in finding out "true state of financial health", Rangarajan said that a dialogue has been initiated with the Institute of Chartered Accountants of India (ICAI) to devise a format of report on the line of long form audit reports of commercial banks.

A committee, consisting representatives of the RBI and ICAI, is also in the process of suggesting new formats of balance sheets and profit and loss account of NBFCs which will reflect the true position of their financial health, he said.

Triple tightener

External audit: Auditors will certify important returns from NBFCs. CA firms may be engaged to carry out special examinations of certain NBFCs. RBI-ICAI panel to devise new formats of balance sheets.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.