Advanced Auditing, Assurance and Professional Ethics · Specialised Areas

Audit of Non-Banking Financial Companies (NBFCs) for CA Final

Updated 5 October 2026

NBFC audit is the statutory audit of a non-banking finance company under the Companies Act, plus extra RBI-driven checks. You verify registration, capital adequacy, income recognition, asset classification and provisioning, then report to members and to the RBI as its directions require. Solve questions by stating the rule, applying the case facts and concluding.

Understand Audit of Non-Banking Financial Companies

An NBFC is a company that mainly lends, invests or deals in securities, or carries on similar financial business. It is registered with and regulated by the RBI under the RBI Act, 1934. It looks like a bank but is not one. It cannot accept demand deposits, does not issue cheques drawn on itself, and its deposits are not covered by deposit insurance.

Your audit has two layers. The first is the normal company audit under the Companies Act and the Standards on Auditing: true and fair view, CARO, internal financial controls. The second is the RBI layer: the NBFC must meet the registration, owned-fund, capital adequacy and prudential requirements, and you must report on these.

The heart of the RBI layer is the prudential norms: income recognition, asset classification and provisioning. A loan is an NPA when it is overdue for more than 90 days. NPAs are then graded as sub-standard, doubtful or loss, and each grade needs a minimum provision. Your job is to test whether the NBFC has classified correctly and provided enough.

If the NBFC follows Ind AS, it books impairment on the expected credit loss (ECL) model of Ind AS 109. The RBI still expects the prudential floor. The comparison is made category-wise, as per the RBI circular on Ind AS implementation (for example, Stage 3 ECL against the NPA provision). If the ECL allowance is lower than the RBI provision in a category, the shortfall is appropriated from profit after tax to an Impairment Reserve. The reserve is not reduced by any excess of ECL over the RBI provision in another category. It is not distributed or reduced for dividend declaration, and any drawdown needs the RBI's prior permission. Examiners like this link.

Bank audit differs mainly in the framework. Banks are governed by the Banking Regulation Act, 1949, with branch and central statutory auditors and a long form audit report. An NBFC is a company with a single statutory auditor under the Companies Act, and the RBI reporting comes through its Auditor's Report Directions. The RBI can also order a special audit of an NBFC under section 45MA of the RBI Act.

Key rules to remember

NPA test: Asset is an NPA if principal or interest is overdue for more than 90 days; Apply on the overdue period at the reporting date. Check the current RBI directions for any carve-outs in the question.
Asset categories: Standard → Sub-standard (NPA up to 12 months) → Doubtful (sub-standard for over 12 months) → Loss; A loss asset is one identified as a loss by the NBFC, its auditor or the RBI, and not yet written off.
Sub-standard provision: Provision = 10% × total outstanding; This is the general rate for a sub-standard asset, that is, one that has been an NPA for up to 12 months. It applies to the total outstanding, whether the asset is secured or not. Do not split it into secured and unsecured portions as you do for a doubtful asset. If a question states a different rate, follow the rate the question states.
Doubtful provision: Unsecured portion × 100% + secured portion × (20% up to 1 year | 30% for 1 to 3 years | 50% over 3 years in doubtful); These are the RBI prudential rates for the secured portion of a doubtful asset in an NBFC. Do not confuse them with the 25%, 40% and 100% scale used for banks. Secured portion = realisable value of security. Unsecured portion = outstanding − secured portion.
Loss asset provision: Provision = 100% of outstanding (or write off); Applies to the amount not already written off.
Ind AS impairment reserve: Impairment Reserve = RBI prudential provision − Ind AS 109 ECL allowance (only if positive, category-wise); The comparison is made category-wise as per the RBI circular on Ind AS implementation. Any excess of ECL over the RBI provision in one category does not reduce the reserve required for another. It is appropriated from profit after tax. It is not distributed or reduced for dividend declaration, and any drawdown needs the RBI's prior permission.
Statutory reserve: Transfer at least 20% of net profit each year to the reserve fund (section 45-IC); Transfer is made before any dividend is declared. Auditor checks it.
Capital adequacy: CRAR = Eligible capital funds ÷ Risk-weighted assets × 100; Compare with the minimum prescribed by the RBI for the NBFC's category (generally 15% overall with Tier 1 of at least 10%). Confirm against the question.

How to solve Audit of Non-Banking Financial Companies questions

Use this order for any NBFC question, whether it is a computation, a reporting issue or a regulatory scenario.

1Identify the entity: NBFC or bank, Ind AS or not, deposit-taking or not, and its RBI category. This decides which rules apply.
2State the governing source in a line: RBI Act, RBI directions, Auditor's Report Directions, Companies Act, CARO 2020, relevant SA.
3List the facts that trigger a rule: overdue days, security value, period in doubtful category, CRAR figures, registration status.
4Apply the rule. For classification, fix the category first. For provisioning, split secured and unsecured and apply the percentages.
5For Ind AS entities, compare the RBI provision with the ECL allowance category-wise and compute any Impairment Reserve.
6Decide the reporting consequence: adjustment in accounts, modification of opinion, CARO comment, report to the Board or RBI, or special audit.
7Conclude in one clear sentence. Use the format provision, facts, conclusion.

Quickest way: Classify, provide, report

When to use it: Use it for short-answer or MCQ cases where you have under five minutes.

Check days overdue. 90 days or less is standard. More than 90 days is an NPA.
Place the NPA in sub-standard, doubtful or loss using the time spent in each category.
Write the provision rate next to each asset, splitting secured and unsecured for doubtful assets.
Add up the provision. For Ind AS companies subtract the ECL and note any shortfall as Impairment Reserve.
Write the one-line reporting effect: qualification, RBI reporting or CARO comment.

Common mistakes in Audit of Non-Banking Financial Companies

Applying 10% provision to the whole doubtful asset
Students mix up the sub-standard rule with the doubtful rule.
Fix: For doubtful assets always split the amount. Unsecured portion gets 100%. Secured portion gets 20%, 30% or 50% by the time in doubtful category.
Calculating the secured portion on the original loan amount instead of the security value
The question gives several figures and students pick the wrong one.
Fix: Secured portion is the realisable value of the security, capped at the outstanding. The rest is unsecured.
Treating bank audit rules as NBFC rules
Both use RBI norms, so the structures blur.
Fix: Remember that an NBFC has one statutory auditor under the Companies Act and reports under the NBFC Auditor's Report Directions. Branch audit and the bank's long form report belong to bank audit.
Ignoring the Ind AS impairment reserve
Students stop once ECL is computed.
Fix: Always compare ECL with the RBI prudential provision, category-wise. If the RBI figure is higher, show the difference as a transfer to Impairment Reserve.
Reporting only to members and forgetting RBI
Students think the audit report under the Companies Act is the only report.
Fix: Add the RBI-directed reporting on registration, owned funds, deposits, prudential norms and capital adequacy. Mention the possible special audit under section 45MA.
Using the old 'assets overdue beyond 180 days' type language
Older material and notes use outdated thresholds.
Fix: Use the current 90-day NPA norm and check any date or threshold given in the question.

Worked examples

Example 1

Case: An NBFC following Ind AS has a loan with outstanding ₹50,00,000, secured by assets with realisable value of ₹30,00,000. The loan has been classified as doubtful for the last 2 years. The Ind AS 109 ECL allowance on this loan is ₹25,00,000. Take this loan as the only asset in its category, so the category-wise comparison is made on this loan alone. As auditor, compute the minimum prudential provision and state the accounting effect.

Show the solution

Category: doubtful for 2 years, so the secured portion attracts 30%.
Secured portion = ₹30,00,000. Unsecured portion = ₹50,00,000 − ₹30,00,000 = ₹20,00,000.
Provision on unsecured portion = ₹20,00,000 × 100% = ₹20,00,000.
Provision on secured portion = ₹30,00,000 × 30% = ₹9,00,000.
Total RBI prudential provision = ₹20,00,000 + ₹9,00,000 = ₹29,00,000.
The comparison is made for the whole asset category. Here the category is only this loan, so compare with ECL: ₹29,00,000 − ₹25,00,000 = ₹4,00,000 shortfall.
The ECL of ₹25,00,000 stays in the statement of profit and loss. The ₹4,00,000 is appropriated from profit after tax to Impairment Reserve. The reserve is not distributed or reduced for dividend declaration, and any drawdown needs the RBI's prior permission.

Answer: Minimum prudential provision is ₹29,00,000. Because ECL is ₹25,00,000, ₹4,00,000 is appropriated from profit after tax to Impairment Reserve. You should check that this appropriation is made and disclosed.

Exam tips

Write the provisioning split in a small table-like list of lines. Examiners award marks per step, so show secured and unsecured separately.
Start theory answers with the legal source: RBI Act, RBI directions, Companies Act, CARO 2020. Then apply facts.
For Ind AS NBFCs, always mention both ECL and the RBI floor with the Impairment Reserve. This is a favourite case twist.
In bank versus NBFC comparisons, cover the governing law, deposit-taking, auditor appointment, reporting format and deposit insurance.
MCQs on this topic have no negative marking. Attempt all of them, and read the facts for the days overdue and the time in the category.

Practice questions from Specialised Areas

Audit of Non-Banking Financial Companies: frequently asked questions

What is the difference between bank audit and NBFC audit?

A bank is governed by the Banking Regulation Act, 1949 and has branch auditors plus a central statutory auditor. An NBFC is a company registered with the RBI and audited by one statutory auditor under the Companies Act. NBFCs cannot accept demand deposits or issue cheques drawn on themselves, so the audit focus is on prudential norms and RBI reporting.

What does the auditor of an NBFC have to report to the RBI?

Under the NBFC Auditor's Report Directions, the auditor reports on points such as registration, owned funds, deposit acceptance, compliance with prudential norms and capital adequacy. Follow the exact list in the directions as given in your study material. Exceptions are reported in the form the RBI prescribes.

When is a loan an NPA in an NBFC?

A loan is an NPA when its principal or interest is overdue for more than 90 days. It is then graded as sub-standard, doubtful or loss, and each grade carries a minimum provision.

What is a special audit under section 45MA?

The RBI can direct a special audit of an NBFC's accounts if it considers it necessary in the public interest or in the interest of the company or its creditors. A chartered accountant is appointed for the specified period and reports to the RBI.