NBFCs struggle to manage compliance obligations. Here’s how to get rid of it

As per details, the RBI has alone issued over 27 regulatory updates specific to the NBFC sector in 2022. Also, a NBFC operating in a single state must comply with at least 621 compliances which involves over 35 one-time registrations and approvals.

The compliance that NBFC have to go through include maintenance of records, returns, and filings under the Prevention of Money Laundering Act, 2002, Prevention of Money Laundering (Maintenance of Records) Rules, 2005, and RBI Guidelines on Fair Practices Code for NBFCs, among others.

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NBFCs have to meet a plethora of return filing requirements and disclosure related compliances under RBI circulars. Besides general compliances RBI circulars, there are specific particulars such as the asset classification norms applicable to NBFCs.

With difficulty in maintaining the compliance, 94 percent of the compliance officers at NBFCs believe they don’t have the required visibility and control in their organization’s compliance program, says a report by TeamLease Regtech.

The report further adds that 92 percent of the surveyed NBFCs agree they had missed at least one critical compliance during the 12-month period.

RBI Master Circular:

To ease up the compliance-based issues for NBFCs, RBI in January 2022, issued the ‘Master Circular – Bank Finance to NBFCs’, that provided for banks to extend working capital facilities and term loans to NBFCs, engaged in activities including infrastructure financing, equipment leasing, hire-purchase, loan, factoring, and investment. However, they cannot grant bridge loans or interim finance. The circular also allowed banks to invest in non-nonvertible debentures (NCDs) whose original/initial maturity was up to 1 year.

Then again in February 2022, RBI issued a notification regarding the implementation of ‘core financial services solution’ (CFSS) by NBFCs.

Also, in April 2022, RBI notified the net owned fund (NOF) requirement for NBFCs to commence or continue operations, that provided that investment and credit companies (ICCs), micro finance institutions (MFIs), and factors must have a NOF of ₹10 crore.

The Central regulator issued a notification, regarding the ‘Compliance function and Role of the Chief Compliance Officer in NBFCs in the Upper and Middle layers. Then again guidelines for ‘Large Exposures Framework for NBFC-UL’ to address the credit risk concentration of the companies in the Upper layer were issued.

In October, the RBI launched the Advanced Supervisory Monitoring System (DAKSH) and among others were released from time to time.

Apart from this, guidelines related to – know your customer (KYC) directions, fair practices, code of conduct for NBFCs, micro finance, gold loan, etc. were released too.

Compliance challenges for NBFCs:

Depending on the size of the business, NBFCs have to comply with several hundred acts and thousands of rules between the prevention of money laundering act, 2002 and the integrated ombudsman scheme, 2021. There is also an additional pressure of keeping up with the policies and rules of the RBI and NHB regulations.

Given below are some of the major compliance challenges faced by the NBFC sector:

a) Rise in compliance burden due to new prompt corrective action (PCA) framework for NBFCs.

b) Rise in compliance burden due to revised regulatory framework for NBFCS.

c) Fluid regulatory environment.

d) Poor tracking and managing applicable licenses

e) Intricate NBFC compliances in India.

f) Lack of accurate list of applicable compliances.

g) Poor tracking of event based compliances.

h) Poor tracking of on-going compliances.

i) Lack of awareness at management level.

j) Manual, paper based and people dependent compliance.

k) Anecdotal compliance certification.

Expected solutions:

With the issues related to compliances and the difficulty in managing them to run NBFC, TeamLease Regtech suggested few measures in their report that may provide some help.

a) Conduct a baseline applicability assessment

b) Subscribe to national, real-time and personalised regulatory updates

c) Create a culture of compliance

d) Digitize compliance management

As over 9,000 registered NBFCs present in India that provide credit services to the underserved sections of the economy, still managing compliances have become a non-ending cycle for almost all NBFCs.

Commenting on the report – simplifying compliance management for NBFCs in India, CEO and co-founder of TeamLease Regtech Rishi Agrawal said, “The NBFC sector is one of the key drivers of growth in the Indian economy. It serves a section of society that is not usually catered to by commercial banks. The report delves into the regulatory ecosystem of NBFCs to give readers an insight into the complexity of the compliance landscape.”

“It points out the challenges and inefficiencies in the present compliance processes adopted by these financial institutions. It also proposes recommendations that will allow these companies effectively manage their compliance obligations with the help of digital processes,” he added. The firm claims to help corporate India stay on the right side of the law.