Pre-audit made mandatory for Tk1cr or above loans from NBFIs

Pre-audit has been made mandatory for Tk1 crore or above loans from non-bank financial institutions (NBFIs) in a bid to curb irregularities and increase compliance in the ailing sector.

The Department of Financial Institutions and Markets of the central bank on Monday issued a circular to this end, which also asked the institutions to launch their internal dashboards – digital management information system – to report and monitor loan sanctioning.

The NBFIs have been directed to inform the central bank immediately if any irregularity is found.

"While looking into reasons behind the abnormal increase in default loans and the shortage in liquidity, NBFIs have been found uncompliant with rules and guidelines. Disbursing of loans without or enough collateral,  exceeding limits in lending individual customers, lack of proper documentation, and failure to ensure proper utilisation of loan money are causing a crisis in the sector," the circular reads.

Lack of management of the internal control and compliance units at NBFIs is blamed for these happenings.

Talking to The Business Standard, a senior Bangladesh Bank official said many necessary documents, including collateral and copies of cheques, cannot be found in many cases when NBFIs go to file lawsuits against their defaulting customers, causing uncertainty in loan recovery.

"The new circular has brought changes in lending rules to ensure compliance and protect the interests of depositors," he said and added that everything will now be cross-checked through pre-audit before loan disbursement.

"Earlier, we would know about irregularities long after loan disbursement. With the implementation of the new circular, we will be able to identify cases before irregularities occur," the official said and noted that the functions of internal credit and compliance units of NBFIs have now been defined clearly so that they can be made accountable.

Industrial and Infrastructure Development Finance Company Managing Director Md Golam Sarwar Bhuiyan told TBS that some NBFIs have been conducting audits for granting loans on their own since long ago. "Now all financial institutions have to practise it to follow the new central bank instructions. It will increase transparency in the sector, I believe."

"In the existing systems, problems are detected long after loan disbursements. If pre-audit are introduced widely, problems can be detected before disbursements," he added.

According to the circular, the internal credit and control units will have to conduct audits before the final approval of loans worth Tk1 crore or above. The units must crosscheck all the required documents and report to dashboards, which will be regularly monitored by the unit heads and chief executive officers.

NBFIs must report their findings on irregularities in loans to the central bank every month, the circular said.

In addition, the reports should also be sent to the chairman of the audit committee of the respective NBFIs and a summary of the abnormalities should be presented at their board meetings, it added.