Pvt firms may take over NBFC inspection

“As per the scheme, the RBI will hand over the inspection of large NBFCs to private auditors,” sources said.

While NBFCs with net owned funds of Rs 500 crore and above will be inspected once in a year by private auditing firms, those with net owned funds in the range of Rs 5 crore to Rs 500 crore will be inspected by them only once in two years. The companies with net owned funds of Rs 5 crore or less will be subjected to only offsite inspections,” sources said.

The scrutiny of around 35,000 applications submitted by NBFCs for registration is also likely to be handed over to some private agencies. The independent agency will be inspecting the applications of the NBFCs to ensure that they comply with the mandatory requirements and inspect the books of accounts if needed and refer the cases to the central bank for final clearance and approval.

However, there is disagreement among the top RBI officials about authorising private auditors to do the annual inspection of NBFCs as the CRB episode occured mainly due to the negligence of such private auditors. In the case of Indian Bank scam and CRB scam, auditors played a negligent role. While the CBI grilled the CRB auditors for giving a clean chit to the CRB group companies, the RBI has temporarily banned the Indian Bank auditor from doing auditing of public sector banks for a few years.

It is pertinent to note that the DoS was constituted to closely monitor the performance of banks and the financial institutions to prevent major frauds from occuring. Since the setting up of these bodies, at least three major mega scams rocked the country – the Indian Bank scam, the MS Shoes scam and currently the CRB scam of Rs 1200 crore. This is in addition to the number of relatively smaller frauds in various public sector banks.

The performance of private auditors in detecting major irregularities have been proved ineffective on a number of occasions, starting with the multicrore securities scam of 1992. The latest one is the CRB scam which has forced the RBI to strengthen the regulatory mechanism. On the other hand, in the last nine months alone, there have been around 25-30 transfers — many of them being out-of-turn punishment transfers. While the experienced hands in crucial departments are transferred either to other centres or some insignificant departments, new officials are brought from entirely unrelated departments of the RBI. While the RBI officials are liable to be rotated every five years, some of the sincere officials had to face the axe before five years for some unknown reasons.