Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs)
Appointment of SCA's/SA's of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs): RBI Guidelines
Definitions:
1. Commercial Banks (CB): Commercial Banks are Scheduled Banks comes under authority of RBI, as almost all banks are considered as commercial banks except those banks which are considered as Small Finance bank, Payments bank and Co-operative bank under the scheduled bank category. Commercial Banks are financial institutions with commercial objective to earn profits on their transactions such as providing loans to governments, corporates, individuals, etc. to earn interest, providing commission and advisory services offered on their saleable products such as underwriting, leasing assets, mortgages, auto loans, business loans, and personal loans. Commercial banks takes deposits from public in order to run their baking business, also offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. CB's can be under both sector i.e. as Public and Private sector Banks.
There are three trigger points as a part of the Prompt Corrective Action (PCA) Framework:
i. Capital Adequacy Ratio (CAR),
ii. net Non-Performing Assets (NPA) and
iii. Return on Assets (RoA),
2. Regional Rural Banks (RRB's): RRB's as rural banks established to meet the needs of rural areas in India. RRB's were established with Narsimha committee on Rural area recommendations with aim to develop banking and different types of banking in Rural areas under Regional Rural Bank Act, 1976, with an aim to help grow banking in rural areas in India.
3. Urban Co-operative Banks (UCB's): “Urban Co-operative Banks (UCBs)” means Primary Cooperative Banks as defined under section 5(ccv) read with Section 56 of Banking Regulation Act, 1949 and includes both uni and multi-State banks. UCB's are only partly regulated by RBI unlike commercial banks. Their banking operations are regulated by the RBI, which lays down their capital adequacy, risk control and lending norms. However, their management and resolution in the case of distress is regulated by the Registrar of Co-operative Societies either under the State or Central government. In UCB's there is no distinction between Shareholder and Borrowers as in UCB Borrowers can also be Shareholder which is not allowed in commercial banks. Eg of CB are State Bank of India (SBI), ICICI Bank, Axis Bank, etc
4. Non-Banking Financial Company (NBFC's): A company registered under Companies Act but attains it's license from RBI to run their business similar to banking services. NBFC's cannot be termed as Commercial Banks as CB are established under the Banking Regulation Act, 1949 and RBI Act. NBFC's can even carry non-banking activities which cannot be done by commercial banks. Foreign investments can be done upto 100% in NBFC's unlike in CB it can be only done upto 74%. As not completely regulated by RBI so NBFC's have less stringent rules to follow compare to CB's. The major difference between NBFC and CB is that unlike CB, an NBFC cannot issue self-drawn cheques and demand drafts. Eg of NBFC's are Bajaj Finserv, Muthoot Finance, Fullerton India, etc.
5. Housing Finance Companies (HFC's): HFC's are a part of NBFC regulated by National Housing Bank (NHB). Those persons who are planning to take a home loan can either take the loan from a bank or they can choose a home loan from a NBFC like a housing finance company (HFC) where choosing between HFC and CB one may need to consider key factors such as loan repayment period, processing fee, interest rate, etc. Home loans offered by both HFC and CB though are similar in nature but the loans have distinct features because of the differences in their regulatory environment and fund sources. Eg of HFC's are DHFL, LIC Housing Finance, GIC Housing Finance, Muthoot Homefin, Manappuram Home Finance Limited, etc.
6. Statutory Audits & Auditors of Banking Industries:
Statutory Audit is an audit which is prescribed by the different statute like Reserve Bank of India, Income Tax, Companies Act, etc. A Chartered Accountant need to conduct many audits as per the different statute requirement. Statutory Audit of banks is mandatory. Statutory Auditors are appointed by RBI in association with the ICAI. Every year after the end of the previous financial year, in every branch of the banks, a very rigorous audit is conducted.
RBI Guidelines for Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) are as follows:
RBI/2021-22/25
Ref.No.DoS.CO.ARG/SEC.01/08.91.001/2021-22
The following guidelines are issued under Section 30(1A) of the Banking Regulation Act, 1949, Section 10(1) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 and Section 41(1) of SBI Act, 1955; and under provisions of Chapter IIIB of RBI Act, 1934 for NBFCs. These guidelines supersede all previous guidelines (list enclosed at Table 1) issued on the subject.
1. Applicability: applicable to the Commercial Banks (excluding RRBs), UCBs and NBFCs including HFCs (hereinafter referred to as the Entities) for Financial Year 2021-22 and onwards in respect of appointment/reappointment of SCAs/SAs1 of the Entities. However, non-deposit taking NBFCs with asset size below ₹1,000 crore have the option to continue with their extant procedure.
For UCBs and NBFCs from FY 2021-22, appointment of SCAs/SAs shall be implemented for the first time with the flexibility to adopt these guidelines from H2 (second half) of FY 2021-22 in order to ensure that there is no disruption.
2. Prior Approval of RBI: Commercial Banks (excluding RRBs) and UCBs will be required to take prior approval of RBI (Department of Supervision) for appointment/reappointment of SCAs/SAs, on an annual basis in terms of the above-mentioned statutory provisions, before 31st July of the reference year and the Public Sector Banks (PSBs) shall approach RBI within one month of receipt of list of eligible audit firms from RBI.
3. Number of SCAs / SAs and Branch Coverage: For Entities with asset size of ₹15,000 crore and above as at the end of previous year, the statutory audit should be conducted under joint audit of a minimum of two audit firms [Partnership firms/Limited Liability Partnerships (LLPs)].
The Entities should decide on the number of SCAs/SAs based on a Board/Local Management Committee (LMC) Approved Policy, inter alia, taking into account the relevant factors such as the size and spread of assets, accounting and administrative units, complexity of transactions, level of computerization, availability of other independent audit inputs, identified risks in financial reporting, etc.
All other Entities should appoint a minimum of one audit firm (Partnership firm/LLPs) for conducting statutory audit. It shall be ensured that joint auditors of the Entity do not have any common partners and they are not under the same network of audit firms. Further, the Entity may finalize the work allocation among SCAs/SAs, before the commencement of the statutory audit, in consultation with their SCAs/SAs.
Considering the above factors and the requirements of the Entity, the actual number of SCAs/SAs to be appointed shall be decided by the respective Boards/LMC, subject to the following limits:
| Sl. No. | Asset Size of the Entity | Maximum number of SCAs/SAs |
| 1. | Upto ₹5,00,000 crore | 4 |
| 2. | Above ₹ 5,00,000 crore and Upto ₹ 10,00,000 crore | 6 |
| 3. | Above ₹ 10,00,000 crore and Upto ₹ 20,00,000 crore | 8 |
| 4. | Above ₹ 20,00,000 crore | 12 |
RBI guidelines on ‘Norms on eligibility, empanelment and selection of Statutory Branch Auditors in Public Sector Banks (PSBs)’, PSBs shall allot the Top 20 branches (to be selected strictly in order of the level of outstanding advances) to SCAs in such a manner as to cover a minimum of 15% of total gross advances of the bank by SCAs. For other Entities (excluding Payment Banks and Core Investment Companies), SCAs/SAs shall visit and audit at least the Top 20 branches/Top 20% of the branches of the Entities (in case of Entities having less than 100 branches), to be selected in order of the level of outstanding advances, in such a manner as to cover a minimum of 15% of total gross advances of the Entities. In addition, the banking companies and NBFCs shall ensure adherence to the provisions of Section 143 (8) of the Companies Act, 2013 regarding audit of accounts of all branches.
4. Eligibility Criteria of Auditors: Each Entity is required to appoint audit firm(s) as its SCA(s)/SA(s) fulfilling the eligibility norms as prescribed in Annex I prescribed in issued RBI guidelines.
5. Time Gap between two Audits : The time gap between any non-audit works (services mentioned at Section 144 of Companies Act, 2013, Internal assignments, special assignments, etc.) by the SCAs/SAs for the Entities or any audit/non-audit works for its group entities should be at least one year, before or after its appointment as SCAs/SAs.
However, during the tenure as SCA/SA, an audit firm may provide such services to the concerned Entities which may not normally result in a conflict of interest, and Entities may take their own decision in this regard, in consultation with the Board/ACB/LMC.
6. Independence of Auditors: For Commercial Banks (excluding RRBs) and NBFCs, the Audit Committee of the Board (ACB)/ LMC shall monitor and assess the independence of the auditors and conflict of interest position in terms of relevant regulatory provisions, standards and best practices.
Concurrent auditors of the Entity should not be considered for appointment as SCAs/SAs of the same Entity. Any concerns in this regard may be flagged by the ACB/LMC to the Board of Directors of the Commercial Bank (excluding RRBs)/NBFC and concerned Senior Supervisory Manager (SSM)/Regional Office (RO) of RBI.
These restrictions above, should also apply to an audit firm under the same network of audit firms or any other audit firm having common partners.
7. Tenure and Rotation of Auditors: Entities will have to appoint the SCAs/SAs for a continuous period of three (3) years, subject to the firms satisfying the eligibility norms each year. An audit firm would not be eligible for reappointment in the same Entity for six years (two tenures) after completion of full or part of one term of the audit tenure. However, audit firms can continue to undertake statutory audit of other Entities.
8. Professional Standards of SCAs/SAs: The SCAs/SAs shall be strictly guided by the relevant professional standards in discharge of their audit responsibilities with highest diligence.
9. Audit Fees and Expenses: The audit fees for SCAs/SAs of all the Entities shall be reasonable and commensurate with the scope and coverage of audit, size and spread of assets, accounting and administrative units, complexity of transactions, level of computerization, identified risks in financial reporting, etc. hall be decided in terms of the relevant statutory/regulatory provisions with Board/ACB/LMC of Entities making recommendations for fixing audit fees.
10. Statutory Audit Policy and Appointment Procedure: Each Entity shall formulate a Board/LMC Approved Policy to be hosted on its official website/public domain and formulate necessary procedure thereunder to be followed for appointment of SCAs/SAs.
For detailed analysis, along with Annexure I & II please find the below link:
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