Best Compliance Management Practices

Anil Kumar, Finance Manager, Jupiter Capital Pvt Ltd, speaks to the India Employer Forum about the best compliance management practices in India.

1.What are the major overarching acts, rules and regulations that regulate NBFCs?

Non-Banking Financial Companies (NBFCs) are regulated by several acts, rules, and regulations, which may vary based on the type of NBFC. The major overarching acts, rules and regulations that regulate NBFCs include the Reserve Bank of India Act 1934, which provides the framework for regulation. The Companies Act 2013 governs the incorporation and operation of NBFCs as companies. It majorly sets out the legal framework for their operations. NBFC Directions and Scale Based Regulations issued by the RBI provide operational guidelines. RBI Master Directions provide regular updates from RBI to address specific regulatory requirements. Securities and Exchange Board of India (SEBI) Regulations apply to NBFCs engaged in capital market activities. Foreign Exchange Management Act (FEMA), 1999 governs foreign investment in NBFCs, especially regarding external commercial borrowings and foreign direct investments. Financial Inclusion and Consumer Protection Regulations focus on consumer protection, financial literacy and responsible lending practices.

2.How has the NBFC regulatory framework evolved over the years?

The regulatory framework for NBFCs has evolved significantly over the years in response to changes in economic conditions, financial markets and consumer protection needs. The sector grew in the 1960s primarily to cater to the credit needs not fulfilled by traditional banks. Initially, it was less regulated as it focused on consumer and business lending. By issuing its first guidelines for NBFCs, the RBI recognized their role in the financial system; after that, NBFCs were required to register with the RBI to enhance oversight. Accordingly, they were mandated to classify assets based on quality, leading to better risk management practices. The RBI also began issuing comprehensive master directions that provided clear operations, governance and risk management guidelines. Post-2008, the financial crisis enhanced corporate governance requirements, leading to increased scrutiny and regulation following systemic risks highlighted by the crisis. Recent developments like digital emphasis on digitalization, risk management, and enhanced corporate governance have revolutionized the sector. With the rise of fintech, regulations began to accommodate digital lending practices and new business models. Overall, the regulatory framework for NBFCs has become more comprehensive and stringent over the years.

3.How is the compliance universe for NBFCs different from banks?

The NBFC compliance universe differs from that of banks in several areas, beginning with the primary regulator, where RBI takes care of NBFCs. In contrast, banks face oversight from additional entities like the Deposit Insurance and Credit Guarantee Corporation. NBFCs face more scrutiny due to stringent capital adequacy norms than banks. Banks are authorized to accept demand deposits, whereas NBFCs cannot. NBFCs enjoy more flexible asset classification standards than those of banks.

Similarly, NBFCs have lenient rate limits compared to banks, which must maintain the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). NBFCs also have less stringent corporate governance standards than banks. Banks have far more comprehensive reporting requirements. Regarding catering customer service and grievance redressal, banks have a more extensive framework.

4.Can you suggest some best compliance management practices that can aid in building a culture of compliance?

Building a culture of compliance is essential for every organization. A strong compliance culture minimizes risks, reduces legal issues and enhances the business’s overall reputation. Compliance culture starts at top management, and compliance should be regularly communicated to all employees, deeming it an organizational priority, not just a regulatory requirement. Organizations should establish and periodically update compliance policies and ensure that these policies are easily accessible to all employees. Compliance training for employees and board members should also be conducted perennially. The organization should appoint a compliance team that has the expertise and should closely work with other departments. A robust risk assessment framework to identify compliance risks should be implemented. Periodic audits should be conducted to assess compliance with policies and regulations. Management should create action plans to address audit recommendations and involve employees in compliance initiatives to get their valuable input. A compliance management software should be utilized for real-time monitoring, tracking and reporting. Tools should be developed to automatically track regulatory updates and changes, and robust structures for reporting compliance issues should be created.

5.RBI mandated the use of digital internal compliance solutions earlier this year. How have these digital compliance management platforms impacted compliance functions?

Digital compliance management platforms have impacted compliance functions positively by bringing several benefits and marking a notable transformation in the compliance landscape for NBFCs. It has streamlined compliance tracking, reporting, and documentation and has enhanced the ability to monitor compliance in real time across various departments. It facilitates better data handling and analysis for informed decision-making. Digital compliance platforms centralize data, documentation and reports in one location, making it easier for compliance teams to review and retrieve historical records during audits or inspections. Digital mechanisms help minimize manual errors, ensuring more accurate compliance management and lower operational costs associated with compliance management. It ensures that only authorized personnel can access/modify compliance-related data, strengthening internal controls and ensuring that NBFCs consistently comply with RBI guidelines and other applicable regulations.

About Anil Kumar

Anil Kumar was born and raised in Kundapur, Udupi District, Karnataka. He completed his Bachelor’s degree in 2004 from Government Ramnarayan Chellaram College, Bangalore, followed by a postgraduate degree (MCom) from Annamalai University, Chennai, in 2008. He later pursued a PGDBA (MBA) from Symbiosis University, Pune, graduating in 2012.

With 18 years of experience in the accounts and finance field, Anil currently serves as a Finance Manager at Jupiter Capital Pvt Ltd, a role he has held since 2021. In his free time, he enjoys listening to music, watching comedy programs, playing badminton and table tennis, and exploring new places.