Essential Compliance Guidelines for Small NBFCs in India: Key RBI Regulations

Introduction

Since 2020, the Reserve Bank of India (RBI) has introduced several guidelines and circulars that have a substantial impact on Non-Banking Financial Companies (NBFCs) across India. Significant measures include the establishment of internal Ombudsmen, scale-based regulations, risk-based internal audits, provisions for standard assets, and a comprehensive review of Peer-to-Peer lending platforms. These regulations present notable compliance challenges, particularly for smaller NBFCs.

I. Membership with Credit Information Companies (CICs)

All NBFCs are required to obtain membership with Registered Credit Information Companies (CICs) in India. These include:

Credit Information Bureau (India) Limited (CIBIL)
Equifax Credit Information Services Private Limited
Experian Credit Information Company of India Private Limited
CRIF High Mark Credit Information Services Private Limited

After obtaining membership, NBFCs must submit monthly reports in a prescribed format covering all issued loans, including outstanding loans for months without new disbursements.

II. Registration with FIU-IND

Each NBFC must register with the Financial Intelligence Unit of India (FIU-IND) and comply with the pertinent reporting obligations.

III. CKYC (CERSAI) Registration

All NBFCs are mandated to register under the Central Know Your Customer (CKYC) framework via the Central Registry of Securitisation Asset Reconstruction and Securities Interest of India (CERSAI). Entities involved in asset reconstruction must adhere to specific reporting requirements tied to this registration.

IV. Compliance with Fair Practice Code

According to the RBI Circular dated September 28, 2006, all NBFCs are required to establish a Board-approved Fair Practice Code within one month of issuance. This code should encompass guidelines for:

Processing loan applications
Loan appraisals, terms, and conditions
Disbursement processes and modifications
Overall operational practices

V. Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) Training

In light of global apprehensions regarding money laundering and terrorism financing, every NBFC must conduct quarterly AML/CFT training sessions for employees and submit a detailed report to the RBI.

VI. Board-Approved Risk Management Policy

A comprehensive risk management policy must be developed and approved by the Board. This policy should lay out a framework for the identification, assessment, mitigation, and monitoring of risks, including credit, liquidity, market, operational, and reputational risks. It must also define clear responsibilities and mandate regular reporting to the Board. Periodic reviews are essential for updating the policy in line with changing market conditions and organizational strategies, ensuring compliance with RBI regulations.

VII. Timely Filing of Various Returns

NBFCs are obligated to file several key returns promptly, including:

DNBS01 - Important Financial Parameters
DNBS02 - Financial Details Return
DNBS03 - Important Prudential Parameters
DNBS04A - Short-Term Dynamic Liquidity (STDL)
DNBS04B - Structural Liquidity & Interest Rate
DNBS06 - Important Financial & Prudential Parameters
DNBS10 - Statutory Auditor Certificate (SAC)
DNBS13 - Overseas Investment Details
Form A Certificate

VIII. Compliance with Mandatory Ratios

NBFCs are required to meet particular mandatory ratios to prevent penalties, including:

Capital to Risk-weighted Assets Ratio (CRAR)
Leverage Ratio
Liquidity Coverage Ratio (LCR)

Non-compliance with these ratios could result in the potential cancellation of the NBFC’s license by the RBI.

Conclusion

This overview delineates critical compliance requirements that all NBFCs in India must observe. It's important to acknowledge that further compliance obligations may emerge according to the size and category of the NBFC, as the RBI classifies them into Base-Layer, Middle-Layer, and Upper-Layers. By adhering to these outlined provisions and RBI guidelines, NBFCs can effectively mitigate the risk of regulatory actions, including license cancellations, which have impacted certain companies due to non-compliance.