How NBFCs can navigate compliance through technology and collaboration

By Rameesh Kailasam and Gaurrav Jaiin

Non-Banking Financial Companies (NBFCs) are important pillars in India’s financial landscape, offering a spectrum of financial services and products to cater to the ever-evolving needs of both businesses and consumers. NBFCs operate within the regulatory framework set forth by the Reserve Bank of India (RBI), guided by the Reserve Bank of India Act 1934 and supplemented by a vast array of master circulars and guidelines issued by the central bank over the years. This regulatory architecture serves as the basis for ensuring the integrity, transparency, and stability of the NBFC sector and safeguards the interests of the concerned stakeholders.

With over 9,000 registered NBFCs in the country across various categories, the retail credit segment stands out as the most pivotal in growth, exhibiting a robust CAGR ranging from 13-15%, similar to traditional banks. Remarkably, NBFCs have garnered a significant market share in retail credit, outperforming conventional banks in this domain. NBFCs have emerged as crucial players in the retail segment primarily due to their remarkable capacity for innovation and adept utilization of technology, something that traditional banks, hampered by their sluggishness, have struggled to match. The sector has emerged as a formidable force, considerably expanding its contribution to India’s GDP from a modest 18% in 2002 to an impressive 60% in 2020, underscoring its key role in driving economic prosperity.

The NBFC sector has relentlessly pursued innovation besides adopting dynamic business models aimed at enhancing consumer experience and expanding their market reach. NBFCs have adopted cross-selling techniques, especially through offering a diverse portfolio of financial products and maintaining strategic partnerships with product companies to introduce innovative financing models, including zero-interest schemes. They have masterfully used technology to revolutionize service delivery, advanced analytics to gain insights into consumer behaviour and created tailor-made financial solutions.

Also read: Six NBFCs must list in the next year, say experts

Despite the progressive trajectory of the NBFC sector, regulatory oversight remains necessary to maintain stability and integrity. The RBI adopts a vigilant approach as it closely monitors the growth and operational practices of NBFCs, with the aim of fostering prudent risk management practices and ensuring overarching compliance with regulatory norms. In the year 2023 alone, RBI issued an extensive list of over 100 circulars, notifications, and directives specifically for NBFCs, suggestive of the central bank’s proactiveness in addressing emerging challenges and creating a conducive regulatory environment.

However, their path to growth includes a myriad of compliance obligations and multiple laws, and dynamic regulations, along with limited skill sets available within the industry. A mid-sized NBFC may find itself navigating through over 1500 compliance requirements across more than 35 regulatory domains, aggravating the complexity of regulatory compliance. As NBFCs diversify their business to include ancillary activities like insurance sales or even e-commerce ventures, they are faced with an array of regulations overseen by various regulators such as the Insurance Regulatory and Development Authority of India, the Securities and Exchange Board of India, and Ministry of Electronics and Information Technology, to name few.

To overcome these obstacles, regulators and NBFCs must explore a collaborative approach proactively. For starters, NBFCs can form dedicated Compliance Committees within their organisations to ensure comprehensive oversight and adherence to regulatory requirements. Additionally, several learning and development initiatives can be started to equip all relevant teams with the necessary knowledge and skills to handle regulatory challenges effectively. Embracing technological solutions such as Regulatory Tech (RegTech) can streamline compliance processes and increase efficiency, while promoting close collaboration between business and regulatory teams. Furthermore, NBFCs can engage constructively with regulators by providing feedback on draft regulations and actively participating in industry consultations to shape regulatory frameworks besides exploring self-regulatory options. 

On part of regulators, consolidating regulatory requirements relevant to different categories of NBFCs into distinct master circulars for clarity and coherence is the need of the hour. A judicious balance has to be struck between regulatory continuity and evolution by issuing amendments to existing regulations rather than repealing master circulars entirely. Boosting transparency and facilitating compliance by clearly delineating revisions in yearly consolidated master circulars can bring about regulatory clarity. Furthermore, allowing for a reasonable transition period for NBFCs to adapt to the dynamic regulations can do away with operation disruptions and lead to compliance efficacy thereby promoting a conducive regulatory ecosystem and innovation.

In recent years, a surge of tech startups, neo-banks as well as fintech ventures have reshaped the financial landscape. With regulatory restrictions barring these entities from operating independently, they end up forging partnerships with traditional banks and NBFCs for leveraging their established infrastructure to implement innovative models. However, in pursuit of rapid growth, some of these collaborations have overlooked customer-centricity and regulatory compliance. The recent heightened regulatory scrutiny of NBFCs has thus kept a check on fintech companies with such irresponsible growth models. Concurrently, the regulators are trying to bring NBFCs at par with traditional banks in terms of compliance and consumer protection standards. This shift is creating a level playing field for regulated fintech companies equipped with NBFC licenses to emerge as a formidable challenge to traditional banks and NBFCs.

With a steadfast commitment to adhering to compliance requirements and following best practices in the industry, NBFCs are set on a path of progress. Promoting collaboration between industry stakeholders and regulators, proactive measures to address emerging challenges, and by leveraging technology, NBFCs can traverse the maze of regulatory compliance and emerge as one of the catalysts of inclusive growth and financial inclusion in India.

(The authors are CEO, Indiatech.org and founder Lexcomply, respectively. Views expressed are the authors’ own and not necessarily those of financialexpress.com.)