CALCUTTA, July 8: The Reserve Bank of India is planning to introduce penalties for erring private auditors looking after the inspection of non-banking finance companies.

Recently, the RBI had proposed that it would monitor only those NBFCs with net owned funds of over Rs 1 crore, while the rest would be left to private auditors. A senior executive of the central bank in Mumbai said that in order to make the auditors accountable they were thinking in terms of imposing a penalty on auditor firms that were found to be lacking in carrying out their duties properly. The nature of the penalty is yet to be decided.The decision of the RBI to leave monitoring of the majority of NBFCs to private auditors - ostensibly at the insistence of the ministry of finance - has sparked off a debate in financial circles. The popular opinion is that it will lead to chaos, with some sort of a nexus developing between the companies and the auditors.

Financial circles said that, while depositors do face problems with large NBFCs, in most cases it is the smaller companies who regularly betray their investors, who are mostly from the rural areas. "It is the smaller companies which need a lot of monitoring," said they feel. Industry sources said that the proposed penalty was a mere "eye-wash". The role of the auditors was cast in a poor light in the CRB Caps episode as also with numerous other finance companies that have been barred by the RBI from accepting deposits from the public.

Senior RBI officials said that private auditors entrusted with the task of monitoring NBFCs will have to be approved by the bank. But, according to some auditors, this has pitfalls as this brings up the question whether the RBI has the necessary qualifications to judge the credentials of auditors. In fact, the committee set up under K S Shere to study the feasibility of setting up a separate system of monitoring NBFCs had opined that the RBI should continue to supervise the NBFCs and that there was no need to create a separate mechanism.

Even the latest RBI Amendment Act of 1997 for regulation of NBFCs has dwelt on the necessity of the monitoring of NBFCs by the apex bank itself.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.