In a bid to strengthen the quality and effectiveness of the internal audit system, the Reserve Bank of India (RBI) on Wednesday issued guidelines on risk-based internal audit (RBIA) system for select non-bank lenders and urban co-operative banks (UCBs). While NBFCs and UCBs have grown in size and become systemically important, prevalence of different audit systems/approaches in such entities has created certain inconsistencies, risks and gaps, RBI said.

The entities have to implement the RBIA framework by March 31, 2022, and have been asked to constitute a committee of senior executives, to be entrusted with the responsibility of formulating a suitable action plan.

All the deposit-taking nonbanking financial companies (NBFCs) and the ones with an asset size of over Rs 5,000 crore, and urban co-operatives banks (UCBs) with assets of over Rs 500 crore will have to migrate to the new system, the RBI said. Currently, all the entities supervised by the RBI have their own approaches on internal audit, resulting in certain inconsistencies, risks and gaps in the system, the RBI said.

The NBFCs and UCBs face risks similar to the ones for scheduled commercial banks which require an alignment of processes, it added. The central bank said the RBIA is an audit methodology that links an organisation's overall risk management framework. It provides an assurance to the board of directors and the senior management on the quality and effectiveness of the organisation's internal controls, risk management and governance-related systems and processes, it added. The internal audit function is an integral part of sound corporate governance and is considered as the third line of defence, it said.

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