Navigating the Regulatory Landscape: A Dive into Understanding NBFC Compliances - CloudBankin – A digital loan software by Habile Technologies
Chapter 1 - NBFC Compliance


Delve into the realm of financial compliance for Non-Banking Financial Companies as we embark on a journey to safeguard stability and integrity. With the Reserve Bank of India (RBI) setting regulatory standards, adhering to financial compliances becomes paramount for NBFCs dealing with public funds. Explore the evolution of regulations, the challenges faced, the proactive outlook to ensure transparency, protect stakeholders, and foster a robust financial system. Join us on this enlightening expedition to unravel the secrets of financial compliance and pave the way for a stronger NBFC sector.

The Importance of Financial Compliances for NBFCs

Financial compliances play a crucial role in the operations of Non-Banking Financial Companies (NBFCs). As NBFCs deal with public money through loans, borrowings, and asset management, they are subject to regulatory standards that are regularly updated by the Reserve Bank of India (RBI). In recent years, the NBFC sector has  witnessed significant growth, expanding its customer base and penetrating even rural markets. In this context, adhering to financial compliances becomes paramount to prevent mishaps, mismanagement of funds, and the misuse of company capital. The RBI’s proactive approach to regulating NBFCs reflects its commitment to maintaining stability and safeguarding stakeholders’ interests.

  • Preventing Mishaps: Compliance with financial regulations ensures robust risk management, safeguarding funds and maintaining trust among stakeholders.
  • Mitigating Mismanagement of Funds: Financial compliances provide a structured framework for efficient fund management, enhancing transparency, risk monitoring, and informed decision-making.
  • Safeguarding Company Capital: Compliance with financial regulations protects invested capital, ensures adequate capital buffers, and fosters confidence in the financial system.
  • Ensuring Consumer Protection: Financial compliances focus on consumer protection through fair practices, disclosure requirements, and grievance redressal mechanisms, establishing trust and fostering ethical business relationships.

Essential Regulatory Compliances for NBFCs: What You Need to Know

Regulatory compliances encompass various aspects that Non-Banking Financial Companies (NBFCs) must be aware of to ensure legal and ethical operations. Understanding these requirements is essential for NBFCs to maintain transparency, establish customers’ identity through Know Your Customer (KYC) policies & prevent money laundering, train employees, manage borrowing practices, establish fair interest rates, and uphold fair practice codes. Additionally, NBFCs should consider factors such as ownership, management, and the financial health of the organization, including aspects like bad loans, non-performing assets (NPA), and capital adequacy ratio. These compliances form the foundation of regulatory adherence for NBFCs.

Evolution of NBFC Regulatory Compliances Over Time

Over the years, regulatory compliance for NBFCs has undergone significant changes. Since around 2015, the RBI has focused on tightening regulations, particularly regarding the source of funds, raising finance, application of funds, and borrower awareness. The emergence of fintech companies has brought challenges such as a lack of borrower awareness and repayment issues. In response, the RBI has introduced stringent measures like KYC policies, fair practice codes, and changes in master directions for different companies. These regulations aim to protect the interests of borrowers and ensure responsible practices. The regulatory environment has become stricter in recent years, promoting improved lending practices and benefiting borrowers.

A decade ago, the compliances were way simpler than now.”
  • Regulatory compliances for NBFCs were relatively simple until 2013.
  • In the past decade, compliances have become more challenging, increasing the cost for NBFCs and favouring big players in the market.
  • This creates an unviable business model for smaller NBFCs and leads to market consolidation, reducing competition and potentially increasing lending costs.
  • It is important for regulators to consider the importance of smaller NBFCs in the ecosystem, as they cater to local areas and provide finance to customers that larger banks and NBFCs may not reach.
  • However, the regulatory environment is becoming less conducive for smaller NBFCs, with increased compliance requirements, such as the need for a dedicated compliance officer (CCO).
  • Promoting a larger number of NBFCs with relaxed regulations would be beneficial for the ecosystem and improve the ease of doing business in the sector.

Understanding the Risk of NBFC Compliances

The RBI Auditing

The frequency of audits conducted by the RBI has increased significantly in recent years. Changes in regulations, such as the net owned fund requirement, which will be operational from 2027, are aimed at regulating the operations of smaller NBFCs and those that are not performing well. It has been observed that certain NBFCs are not adhering  to the required policies, especially those operating with a capital base of less than 100 crores. These non-compliant NBFCs may neglect KYC procedures, fail to display necessary documentation, and lack transparency in their operations.

To address these concerns, the RBI has appointed officials to conduct regional audits on a regular basis. These audits serve to identify gaps and record observations, prompting NBFCs to comply with the regulations. The audits primarily focus on policies and transparency, highlighting areas that require attention.

Failure to Compliance Filings by NBFCs: Consequences
  • Examples of non-compliance filings include the failure to mention all applicable costs in loan agreements, including interest, processing fees, penalty charges, and foreclosure fees. The RBI emphasizes the importance of transparency by requiring NBFCs to clearly disclose the cost of loans to customers, accounting for various factors such as income generation and additional charges. Furthermore, interest rate policies and risk management committees should be mentioned on the NBFC’s website to ensure transparency and accountability.
  • Failure to comply with regulations and policies results in heavy penalties imposed by the RBI. Additionally, the concept of “compounding” comes into play, where NBFCs acknowledge their mistakes and pay additional penalties as a declaration of improved compliance. Late submission fees (LFS) are also charged for delayed reporting, further emphasizing the importance of timely compliance.
  • It is crucial for NBFCs to disclose any penalties received from the RBI in their financial statements, ensuring transparency for investors and stakeholders. Repetitive mistakes may lead to the cancellation of an NBFC’s license. However, the RBI provides NBFCs with opportunities to rectify their mistakes and asks for explanations to promote continuous improvement.
  • A real example of compliance challenges occurred in 2022 when many NBFCs encountered difficulties in filing their compliances with the RBI due to a software transition from COSMOS to XBRL. Some NBFCs submitted hard copies, while others waited for the transfer to XBRL or filed manually. In such cases, the RBI demonstrated leniency, promptly responding within 2-3 days and allowing NBFCs to rectify the situation without severe consequences.

Striving for Clarity and Compliance: An Outlook On The Current RBI Regulations

  • The current regulations are implemented to prevent instances where NBFCs default on their commitments to deposit holders, causing a significant impact on society.
  • These regulations are introduced after discovering violations and non-compliance by NBFCs.
  • There may still be attempts by companies to find loopholes in the new compliances.
  • Ambiguity exists in RBI’s master directions regarding their applicability and extent of compliance.
  • For instance, while the statutory policy states that regulations apply to NBFCs with asset sizes over 1000 crores, an email from RBI states that it should be followed by everyone, creating ambiguity.
  • It is important for the RBI to provide clear and unambiguous guidelines, ensuring consistency in compliance.
  • Inputs from business owners and industry leaders have been considered in formulating these regulations, making them industry-driven.
  • The RBI aims to prevent dubious companies from filing inaccurate returns and protect public funds involved in NBFC operations.
  • These regulations primarily aim to prevent NBFCs from accumulating bad loans, engaging in aggressive growth strategies, and ensuring the overall health of the business.
  • The RBI also strives to increase access to borrowing for all segments of the country’s population while maintaining financial stability and preventing defaults.


As we conclude, it becomes evident that adherence to regulatory standards is not only crucial but also a catalyst for stability, transparency, and trust. The journey has highlighted the importance of preventing mishaps, mitigating fund mismanagement, safeguarding company capital, and ensuring consumer protection. With a vigilant RBI and industry-driven regulations, NBFCs can navigate the compliance landscape while fostering responsible practices and contributing to a resilient financial ecosystem. Together, let us continue striving for excellence in compliance, empowering NBFCs to flourish and serve as pillars of financial integrity.

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