Special Features of Audit of Banks & Non-Banking Financial Companies: formula sheet

Key formulas

NPA test (general)

Interest or instalment of principal overdue for more than 90 days → NPA

Special tests apply for overdraft/cash credit (out of order), bills purchased/discounted and agricultural advances. Use the test given in the question.

Out of order (CC/OD)

Any one of these makes the account out of order, and so an NPA: (a) outstanding balance continuously exceeds the sanctioned limit or drawing power for more than 90 days; (b) no credits continuously for 90 days as on the balance sheet date; (c) credits during the previous 90 days are not enough to cover the interest debited during the same period

Each test is an alternative, so one is enough. Do not look only at the balance. Compare credits in the 90-day period with interest debited in that same period.

Sub-standard asset

NPA for a period of up to 12 months

Provision: 15% of outstanding on the secured portion. On the unsecured exposure, the general rate is 25%, but it is 20% for unsecured exposure in infrastructure loan accounts. If the question gives rates, use those.

Doubtful asset

Sub-standard for more than 12 months

The bands run from the date the asset is classified as doubtful, which is after 12 months as sub-standard. Secured portion: 25% (up to 1 year as doubtful), 40% (1 to 3 years as doubtful), 100% (more than 3 years as doubtful). Unsecured portion: 100%.

Loss asset

Loss identified but not fully written off

Provision: 100% of outstanding, or write off.

Standard asset provision

Provision as a percentage of outstanding standard advances, at the rate prescribed by RBI for the category

Rates differ by sector, such as agriculture, SME, commercial real estate. Use the rate given in the question.

Provision on doubtful asset

Provision = (Unsecured portion × 100%) + (Secured portion × applicable %)

Unsecured portion = Outstanding − Realisable value of security.

Income recognition

NPA: interest recognised only when received; uncollected interest already booked is reversed

Reverse the amount credited to profit and loss but not collected.

Statutory format

Form A = Balance Sheet; Form B = Profit and Loss Account (Third Schedule, Banking Regulation Act, 1949)

Banking companies must prepare accounts in these forms. Do not apply the Companies Act Schedule III format to a bank.

Income on NPA

NPA interest = recognised only on receipt; previously accrued uncollected interest = reversed

This is the main income-recognition risk in bank audit.

Investment classification

HTM, AFS, HFT per RBI norms; valuation per RBI guidelines for each category

State that classification and valuation follow RBI directions, and that transfers between categories need compliance with RBI rules.

Interest recomputation

Interest = Principal × Rate × Time ÷ 100

Use it for substantive recomputation of simple interest on sampled accounts. Use the product's compounding terms where applicable.

Deposit audit assertion

Risk = completeness (understatement of liability)

Direct procedures to unrecorded and misclassified deposits.

Trigger for special audit (section 45MA(1))

RBI satisfied it is necessary in public interest or depositors' interest → RBI may at any time direct special audit, for the period or periods it specifies, by a chartered accountant

The power belongs to the RBI. The NBFC must comply with the direction.

Who audits (section 45MA)

Chartered accountant for the special audit → may be the NBFC's own statutory auditor or another chartered accountant

The CA need not be a stranger to the company, but the RBI, not management, directs the audit.

Powers, duties and report (section 45MA)

Chartered accountant → powers, functions and duties of an auditor under the Companies Act, 2013; report to the RBI

Reporting to the RBI is the key difference from a normal statutory audit report.

Cost of special audit (section 45MA)

Expenses of, and incidental to, the special audit (including auditor's remuneration) determined by the RBI → borne by the NBFC

The auditor's fee is not negotiated with management.

Statutory auditor's directions-based reporting

Report to Board on CoR, net owned fund, prudential norms and deposit rules; report non-compliance on specified matters to RBI as the directions provide

Learn this as a separate duty from section 45MA.

Fraud reporting under section 143(12) (Rule 13)

Fraud of ₹1 crore or more → Board or Audit Committee within 2 days of knowledge (reply sought within 45 days), then Central Government within 15 days of the Board's reply or of the 45 days lapsing; below ₹1 crore → Audit Committee or Board within 2 days of knowledge, and the company (not the auditor) discloses the details in the Board's report under section 134(3)(ca)

A Companies Act duty of the auditors, separate from RBI reporting.

Answer structure

Provision → Facts → Conclusion

Use this for every audit question in the case MCQ and written parts.

NPA test

Asset is an NPA when principal or interest is overdue for more than 90 days

The 90-day norm applies to NBFCs across the layers under scale-based regulation. Base layer NBFCs had transition provisions to reach it, so follow the dates given in the question or the current RBI directions. Count days from the due date, not from the date of the audit.

Sub-standard asset

NPA for a period not exceeding 12 months

General provision of 10% of the total outstanding. Apply it to the total outstanding and follow the facts given in the question if they call for a different treatment.

Doubtful asset

NPA that has remained sub-standard for 12 months; the doubtful period is counted from that point

Provision: 100% of the unsecured portion, plus 20% (doubtful for up to 1 year), 30% (1 to 3 years) or 50% (more than 3 years) of the secured portion.

Loss asset

Asset identified as loss by the NBFC, its auditor or RBI, and not written off

Provision: 100% of the outstanding.

Unsecured portion

Unsecured portion = Outstanding − Realisable value of security

Use the realisable value, not the original value of the security.

Capital adequacy ratio (CRAR)

CRAR = (Tier 1 capital + eligible Tier 2 capital) ÷ Risk-weighted assets × 100

The usual exam test is a minimum CRAR of 15% with Tier 1 at least 10%. These are illustrative figures of the kind used for ICC-type NBFCs, not requirements for every layer. Use the minimums the question gives, and if it gives a CET1 minimum, test CET1 as well. Tier 2 counted cannot exceed 100% of Tier 1. Take layer-specific figures from the question or the current RBI directions.

Income recognition

No income on NPAs until actually received; reverse interest accrued but unrealised

Under Ind AS, interest on Stage 3 assets is computed on the net carrying amount (after ECL).

Impairment reserve (Ind AS NBFCs)

If Ind AS 109 provision < norms provision, transfer the difference from profit to impairment reserve

Compare asset-class-wise. The reserve is not distributable.

Statutory reserve fund

Transfer at least 20% of net profit each year to the reserve fund

Required under Section 45-IC of the RBI Act. The transfer is made out of net profit as disclosed in the profit and loss account, before any dividend is declared.

Quick revision

• A bank audit has the usual company-audit duties plus banking-specific reports and RBI requirements.
• Know which statutes and RBI directions govern the entity before you answer any question.
• Advances carry the highest audit risk in a bank, so focus your evidence work there.
• Asset classification depends on whether the borrower's account is performing under the RBI norms.
• Provisioning follows asset classification, so a wrong class means a wrong provision.
• Check that interest on NPAs is not wrongly recognised as income.
• For investments, verify existence, ownership, valuation and correct classification.
• An NBFC is regulated under the RBI Act, so its framework differs from a bank's.
• The NBFC auditor reports under the Companies Act and under the RBI's Auditor's Report Directions, 2008. Do not attribute these duties to a single RBI Act section.
• Prudential norms for NBFCs cover asset classification, provisioning and capital, and the auditor reports on compliance.
• Write answers in provision, facts, conclusion form.
• Always state the conclusion: what the auditor does or reports.

Common mistakes

• Applying the provision percentage to the whole outstanding instead of the secured and unsecured portions separately. Fix: Always first compute realisable security value. Provide 100% on the unsecured part of a doubtful asset, then the secured percentage on the rest.
• Counting the 90 days from the date of sanction or the date the loan was disbursed. Fix: Count from the date the interest or instalment became due and remained unpaid.
• Treating accrued interest on an NPA as income Fix: For NPAs, recognise interest only on receipt and reverse uncollected accrued interest.
• Using the Companies Act Schedule III format for a bank Fix: Say that banks follow Form A and Form B of the Third Schedule to the Banking Regulation Act, 1949.
• Saying the NBFC's management appoints the special auditor under section 45MA. Fix: Remember that the RBI directs the special audit by a chartered accountant. Management does not choose the special auditor.
• Sending the special audit report only to the shareholders. Fix: The special audit report is submitted to the RBI.
• Applying the provision percentage to the secured portion only for a sub-standard asset. Fix: For sub-standard assets, apply 10% to the total outstanding. Split into secured and unsecured parts for doubtful assets. Always follow the facts given in the question.
• Counting the age of a doubtful asset from the date the loan became overdue. Fix: An asset is doubtful only after it has stayed sub-standard for 12 months. Use the time spent in the doubtful category to pick the 20%, 30% or 50% rate.

Exam tips

• In theory answers, start with the rule, then the facts, then the conclusion and audit action. Examiners reward that order.
• In MCQs, read the account type first. The same overdue days can mean different things for a term loan and a cash credit account.
• In numerical questions, show the split between secured and unsecured portions in a clear table-like list, since marks follow the working.
• Mention evidence in verification answers: sanction letter, loan agreement, charge documents, security valuation, stock statements, drawing power, confirmation from borrowers and recovery position.
• Always state that you used the RBI norms applicable to the question. If a percentage is given in the question, use it even if it differs from your memory.
• In written answers, start with the RBI or Third Schedule rule, then apply the facts, then conclude.
• For investment questions, always mention classification, valuation and external confirmation.
• In MCQs, watch for the NPA interest trap and for answers that use Schedule III instead of the Third Schedule.