RBI is the major regulator of NBFCs:

It prescribes rules and guidelines for their operations, such as capital adequacy, risk management, and protection of customers.

Ministry of Corporate Affairs:

NBFCs are also regulated further by MCA in terms of corporate governance and financial reporting.

Depending on the activities it is carrying out, an NBFC is governed by other regulatory requirements from SEBI for its securities and IRDAI for its insurance products.

Asset-Liability Management:

Required to institute proper asset-liability management practices to minimize risks.

Furnish varied periodical returns on diverse events such as quarterly, yearly, and others as visualized by the RBI.

Furnish compliance reports to establish compliance with the regulatory norms.

Adopt the Fair Practices Code for NBFCs, which refers to a code constituting guidelines for fair treatment of customers.

Formulate a system for redressing grievances received by it from its customers.

Utilize procedures of Know Your Customer (KYC) and Anti-Money Laundering (AML) to prevent financial crimes.

Regular risk assessments must be performed, and the nature of risks must be determined, along with establishing criteria for controlling possible risks.

Strategies in terms of effective risk mitigation must be applied, and losses must be minimized.

The board of directors should consist of qualified individuals having relevant expertise.

Internal control systems must be strong enough to avoid fraud and errors.

Related Party Transactions:

Address related party transactions, as per directives in regulatory guidelines.

Customer Data Protection:

Prevent data breaches through all kinds of measures to protect the customer’s data.

Maintain solid cyber security practices surrounding the IT systems of the NBFC

The NBFC will make its income tax return and also pay the taxes as required within the given time frame, in compliance with the enactment.

The NBFC will comply with other taxes applicable, including GST, stamp duty, and property tax.

Regulatory Complexity:

There is a complex regulatory scenario that the NBFCs have to contend with.

Implementation of Technology:

Technology implementation can help the NBFC to streamline the compliance process and minimize errors.

Outsourcing Compliance:

The best practice could be to outsource the compliance functions to specialized firms so that the company ascertains that all the regulatory requirements are adhered to. Effect of Recent Regulatory Changes

Guidelines of RBI on Digital Lending:

The RBI has issued guidelines in respect of digital lending, including regulations about loan pricing, protection of customer information, and data privacy.

Revised Prudential Norms:

The RBI has revised the prudential norms applicable to the NBFC industry, inter alia, about capital adequacy and exposure limits.

Emphasis on financial inclusion has increased, and NBFCs may eventually play a role in providing services to the underserved population.

Competition with Fintech Companies:

Fintech companies, which were once conceived as startups, are changing the landscape of financial services. The competition is forcing NBFCs to think about adapting to changes.

Technological Advancements:

Technology, like artificial intelligence and blockchain, is shifting the paradigm of financial services.

Uncategorized

NBFC Annual Compliance: A Complete Guide

Nikita P

November 27, 2024

4 min read

Introduction

Non-Banking Financial Companies or NBFCs have emerged as a highly promising sector in the Indian economy. They offer a multitude of different financial services. With that in mind, an NBFC needs to comply with a plethora of annual compliance that ensures that the alignment and adjustment of its activities are as per the regulatory norms and ethical standards.

Regulatory Authorities for NBFCs

RBI is the major regulator of NBFCs: It prescribes rules and guidelines for their operations, such as capital adequacy, risk management, and protection of customers.
Ministry of Corporate Affairs: NBFCs are also regulated further by MCA in terms of corporate governance and financial reporting.
Other Regulators: Depending on the activities it is carrying out, an NBFC is governed by other regulatory requirements from SEBI for its securities and IRDAI for its insurance products.

Annual Compliance Requirements of NBFCs

NBFCs have to adhere to an extensive annual compliance requirement to ensure that their operations are sound, ethical, and transparent.

1. Financial Reporting:

Submission of audited financial statements to RBI within due dates.
Maintaining appropriate capital adequacy ratios as stipulated by RBI.
Asset-Liability Management: Required to institute proper asset-liability management practices to minimize risks.

2. Regulatory Returns:

Periodic Returns: Furnish varied periodical returns on diverse events such as quarterly, yearly, and others as visualized by the RBI.
Compliance Reports: Furnish compliance reports to establish compliance with the regulatory norms.

3. Protection of Customer:

Fair Practices Code: Adopt the Fair Practices Code for NBFCs, which refers to a code constituting guidelines for fair treatment of customers.
Grievance Redressal: Formulate a system for redressing grievances received by it from its customers.
KYC and AML: Utilize procedures of Know Your Customer (KYC) and Anti-Money Laundering (AML) to prevent financial crimes.

4. Risk Management:

Risk Assessment: Regular risk assessments must be performed, and the nature of risks must be determined, along with establishing criteria for controlling possible risks.
Risk Mitigation: Strategies in terms of effective risk mitigation must be applied, and losses must be minimized.

5. Corporate Governance

Board of Directors: The board of directors should consist of qualified individuals having relevant expertise.
Internal Controls: Internal control systems must be strong enough to avoid fraud and errors.
Related Party Transactions: Address related party transactions, as per directives in regulatory guidelines.

6. Technology and Data Security

Customer Data Protection: Prevent data breaches through all kinds of measures to protect the customer’s data.
Cyber Security: Maintain solid cyber security practices surrounding the IT systems of the NBFC

7. Taxation

Income Tax: The NBFC will make its income tax return and also pay the taxes as required within the given time frame, in compliance with the enactment.
Other Taxes: The NBFC will comply with other taxes applicable, including GST, stamp duty, and property tax.

Challenges and Best Practices for NBFC Annual Compliance

Regulatory Complexity: There is a complex regulatory scenario that the NBFCs have to contend with.
Implementation of Technology: Technology implementation can help the NBFC to streamline the compliance process and minimize errors.
Outsourcing Compliance: The best practice could be to outsource the compliance functions to specialized firms so that the company ascertains that all the regulatory requirements are adhered to. Effect of Recent Regulatory Changes

Ever-changing regulatory updates and their significance for them in their operations. The recent developments under the head of NBFCs are as follows:

Guidelines of RBI on Digital Lending: The RBI has issued guidelines in respect of digital lending, including regulations about loan pricing, protection of customer information, and data privacy.
Revised Prudential Norms: The RBI has revised the prudential norms applicable to the NBFC industry, inter alia, about capital adequacy and exposure limits.
Financial Inclusion: Emphasis on financial inclusion has increased, and NBFCs may eventually play a role in providing services to the underserved population.

Emerging Trends and Challenges

There are numerous emerging trends and challenges for the NBFCs:

Competition with Fintech Companies: Fintech companies, which were once conceived as startups, are changing the landscape of financial services. The competition is forcing NBFCs to think about adapting to changes.
Technological Advancements: Technology, like artificial intelligence and blockchain, is shifting the paradigm of financial services.

Cyber threats are on the rise. To protect the systems, it is the duty of NBFCs to invest in strong security.

Read blog: NBFC Registration