A change in risk-based internal audit system to HFCs

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To improve the standard and effectiveness of their internal audit system, the banking company extended the risk-based internal audit (RBIA) system to pick out housing financing enterprises on Friday. The RBI had issued a circular in February this year mandating the RBIA framework for select non-banking financial firms (NBFCs) and concrete co-operative banks by March 31, 2022. On Friday, the RBI extended the necessities for NBFCs to housing finance companies (HFCs) yet.

A housing finance company (HFC) is a type of non-banking financial company (NBFC) that specializes in providing housing loans. According to the financial institution, the regulations would apply to all or any deposit-taking HFCs, no matter their size, similarly to non-deposit-taking HFCs with assets of Rs 5,000 crore and beyond. By June 30, 2022, these HFCs must have an RBIA framework in situ.

For the Board of Directors and senior management, an effective RBIA is an audit methodology that connects an organization’s overall risk management framework and ensures the standard and effectiveness of the organization’s internal controls, risk management, and governance-related systems and processes.

According to the RBI’s February circular, the interior audit function should use a scientific and disciplined methodology to review and contribute to the general development of the organization’s governance, risk management, and control procedures. It had stated that the role is a vital aspect of excellent corporate governance and is considered the third line of defence.

Historically, the interior audit system at NBFCs/UCBs has mostly focused on transaction testing, testing of accounting records and financial reporting for correctness and dependability, and adherence to legal and regulatory standards, which cannot be sufficient during a changing context. Transitioning to a framework that focuses on the assessment of risk management systems and control procedures in various areas of operations, in addition to transaction testing, will assist in predicting and controlling potential risks, according to the financial institution.

The RBIA framework must be adopted by all deposit-taking NBFCs, non-deposit-taking NBFCs with assets of Rs 5,000 crore or more, and UCBs with assets of Rs 500 crore or more by March 31, 2022, according to the Federal Reserve Bank of India.

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