Roles of Statutory auditors on wilful defaulters Matter

RBI Guidelines on Roles & Responsibilities on Statutory Suditors in wilful defaulters case

The Reserve Bank of India Circular on “Master Direction on Wilful Defaulters and Large Borrowers” dated 30.7.2024 outlines several key roles and responsibilities for statutory auditors. These directives aim to enhance the accountability of statutory auditors, ensure proper monitoring of the end-use of funds, and prevent the diversion or siphoning of funds by borrowers. The involvement of independent auditors and the potential commissioning of forensic audits are key measures in achieving these goals. Here are the main points extracted from the circular:

• Formal Complaint Against Statutory Auditors: If lenders observe falsification of accounts by borrowers and identify negligence or deficiency in the auditors’ conduct, they should lodge a formal complaint against the statutory auditors with the National Financial Reporting Authority or the Institute of Chartered Accountants of India. This action will enable these bodies to examine and fix accountability on the auditors.
• Reporting and Forwarding Complaints: Pending disciplinary action by National Financial Reporting Authority or the Institute of Chartered Accountants of India, lenders must forward the complaints to the Reserve Bank and the Indian Banks’ Association. Before reporting, lenders must ensure the involvement of the concerned auditors and give them an opportunity to be heard, following normal procedures & processes, which should be properly documented.
• Caution List of Auditors: Based on information received from lenders, Indian Banks’ Association will prepare a caution list of such auditors for circulation among lenders, who must consider this aspect before assigning any work to them.
• Monitoring End-Use of Funds: If lenders require specific certification from borrowers’ auditors regarding the diversion or siphoning of funds, appropriate covenants must be included in loan agreements to enable the award of such a mandate to the auditors.
• Engaging Lenders’ Own Auditors: Lenders are free to engage their own auditors for specific certification regarding the diversion or siphoning of funds by borrowers, without relying solely on the certification provided by the borrowers’ auditors.
• Commissioning Forensic Audits: Depending on the nature of the borrowers’ acts and the quality of evidence available, lenders should consider commissioning a forensic audit of the borrowers’ affairs and their books of accounts for accounts with outstanding amounts above a threshold set by the lender’s board-approved policy.

RBI guidelines for banks & NBFC on Wilful Defaulters and Large Borrowers, related issued

The Reserve Bank of India’s Master Direction on the Treatment of Wilful Defaulters and Large Borrowers, issued, outlines comprehensive guidelines for banks and Non-Banking Financial Companys regarding the identification and classification of wilful defaulters. Reserve Bank of India’s guidelines are designed to enhance the accountability and monitoring of wilful defaulters, thereby safeguarding the financial system and ensuring fair practices in lending and credit management. Details Reserve Bank of India’s guidance are mentioned here Under :

• Examination of Wilful Default: All non-performing asset accounts with outstanding amounts of INR 25 lakh and above must be examined for wilful default. A ‘wilful defaulter’ is a borrower or guarantor who has committed wilful default with an outstanding amount of INR 25 lakh and above. Lenders must follow a specified procedure to identify and classify a person as a wilful defaulter. Evidence of wilful default will be examined by an identification committee. If wilful default is observed in the internal preliminary screening, lenders must complete the classification process within 6 months of account being classified as Non-Performing Assets.
• Policy and Public Disclosure of Wilful Defaulters and Large Borrowers : Lenders should formulate a non-discriminatory board-approved policy that outlines the criteria for publishing photographs of persons classified as wilful defaulters. The directions objective to ensure a non-discriminatory & transparent procedure, adhering to principles of natural justice, for classifying a borrower as a wilful defaulter.
• Credit Restrictions on Wilful Defaulters : No additional credit facility shall be granted to a wilful defaulter or any organization associated with a wilful defaulter. This restriction will remain effective for one year after the wilful defaulter’s name has been removed from List of Wilful Defaulters by Lender.
• Objective and Implementation of Wilful Defaulters and Large Borrowers : To provide a transparent and non-discriminatory procedure for classifying a borrower as a wilful defaulter. To establish a system for disseminating credit information about wilful defaulters, cautioning lenders to avoid extending further institutional finance to them. These directions will come into effect Ninety days from date of issuance.