Navigating Regulatory Challenges: A Balancing Act for NBFC Leaders

The Elets 15th NBFC100 Tech Summit provided a platform for industry leaders to discuss the regulatory challenges faced by Non-Banking Financial Companies (NBFCs). These insights provided a comprehensive overview of the financial sector’s shifting landscape.

The Role of RBI in Maintaining Transparency

Gaurav Dugar, General Counsel and EVP at CredAble, elucidated on the Reserve Bank of India’s (RBI) role in championing disclosure and transparency. The crux of the RBI’s directives centers around ensuring customers are informed about the risks they assume when participating in the financial ecosystem. Dugar further emphasized that the industry benefits from a system initiated and supported by government institutions such as the RBI and the NPCI. Consequently, there’s a collective responsibility to contribute positively. Furthermore, the rise of centralized KYC depositories (C-KYC) and the rapid acceleration of digital transformation, especially during the recent pandemic, have witnessed the inception of many smaller entities.

Dugar also touched upon the evolving landscape of data protection and privacy. Legislation, rules, and judicial verdicts, especially those around Aadhaar, have been pivotal. He mentioned that the onus is now on the RBI to guide the industry towards ensuring customer data privacy.

The Imperative Nature of Change and Regulation

V.P. Nandakumar, the CEO of Manappuram Finance Limited, began by stressing that change is not merely optional in today’s dynamic environment – it’s mandatory. Regulators are leaning towards a tech-forward approach, making it imperative for the financial system to sync with global trends. This shift, he noted, also presents challenges, particularly in data privacy and potential frauds. The landscape for NBFCs, especially the larger ones, involves navigating through stringent regulations. However, Nandakumar underscored that the advantages of compliance significantly overshadow the initial regulatory apprehensions.

He further highlighted the increasing significance of roles like the Chief Technology Officer and the Chief Risk Officer. These roles ensure customer-centric compliance, data privacy, and the successful integration of various platforms.

Emphasizing Stability and Consumer Protection

Deo Shankar Tripathi of Aadhar Housing Finance provided a detailed view of the regulatory spectrum affecting businesses, from the RBI to the Income Tax Department. The RBI’s tiered approach to regulations, he mentioned, is designed to support businesses of different scales. A pivotal change was the mandatory appointment of a Chief Compliance Officer for entities valued above 1,000 CR rupees from October 2023. Tripathi underscored the RBI’s three primary concerns: financial system stability, consumer protection, and continuous innovation. He highlighted the RBI’s delicate balance between fostering innovation and ensuring stringent regulation.

Rapid Technological Evolution and Customer-Centricity

Roopesh Chandran from BoB Financial Solutions Ltd. marveled at the swift technological and systemic advancements over the past decade. He praised regulatory bodies like the RBI for their proactive and adaptive stance. Chandran emphasized the importance of the consumer as the primary driving force. He believes regulations and innovations should ensure benefits for all, promoting inclusivity and ensuring no marginalization.

The pace of technological and systemic advancements in recent years is truly remarkable. Reflecting on just a decade ago; concepts like UPI, Aadhaar KYC, and JanDhan were unfamiliar to most of us. Fast forward to today, and they’re integral to our daily lives. It’s hard to believe that two decades ago, many of us didn’t even possess a mobile phone, while now it’s unimaginable to go a moment without one.

Kudos to our regulatory bodies for staying abreast of these rapid changes. In numerous interactions with regulators, I’ve observed their proactive approach towards adaptation. They aren’t just passive rule-setters, waiting for the perfect time to implement changes. The establishment of the Innovation Hub by the RBI and the opportunities for sandbox testing they provide are testaments to their forward-thinking attitude. They ensure a level playing field while safeguarding consumer interests.

The Role of RBI: A Vigilant Watchdog

Aiswarya Ravi, Chief Financial Officer at Kinara Capital, provided a threefold categorization of the RBI’s stance: enabling growth, promoting transparency, and maintaining vigilance. She elaborated on the RBI’s proactive role in fostering growth and ensuring businesses and consumers enjoy complete transparency. The RBI’s vigilant approach aims to ensure standardized practices and balance opportunities with responsible lending.

Enabling: RBI has been proactive in facilitating growth in our sector. For instance, the recent circular regarding credit via UPI reflects their adaptive mindset. In comparison to other regions like Europe, the growth witnessed in India’s segment is both distinct and advanced. Additionally, RBI’s positions on digital lending and co-lending frameworks indicate their commitment to fostering a conducive business environment for banks and NBFCs.

Promoting Transparency: Transparency is vital for both businesses and customers. For businesses, it’s about ensuring financial stability and compliance. Canar Capital’s adherence to the latest AML, FATF regulations, and the synchronization with RBI’s KYC norms are not merely out of regulatory obligation. It’s vital for us to understand the origins of our financial sources. For customers, it’s about clarity on their financial commitments. RBI’s emphasis on key fact statements ensures customers have a comprehensive understanding before entering any loan agreement.

Vigilance: RBI’s vigilance ensures standardized practices across the board. Their regulations, like the scale-based guidelines and the new NBAA norms, aim to create a harmonious ecosystem. Though there’s always anticipation about RBI’s next regulatory move, I believe their overarching goal is to balance financial business opportunities with responsible lending and customer protection.

Seeking Clarity from the RBI

Kanika Garg of Tata Motors Finance appreciated the RBI’s proactive approach in recent times. However, she expressed the need for clearer directives to understand the exact intent behind the regulations. Garg mentioned the importance of aligning an organization’s interests with those of its customers to interpret the spirit of the guidelines better.

Four Pillars of Instilling Ethics

Sakya Dasgupta, Vice President and APAC Leader at Fintellix, shifted the focus towards inculcating ethics within an organization. He identified four foundational pillars essential for fostering a strong ethical culture:

People: Ensuring that your team aligns with and upholds the organization’s ethical standards is paramount. To illustrate, I recall an incident in Bangalore where my cab driver, urged by me to drive faster, was halted by an app notification warning him against speeding. It served as a real-time reminder of practicing business ethically. Similarly, financial institutions sometimes use visible reminders about the consequences of non-compliance, nudging employees towards ethical behavior.

Process: With the surge in technological advancements, there’s an emphasis on creating efficient systems. However, it’s equally vital to develop processes that are ethically sound. Whether it’s procedures at a branch or in the field, the foundation should be laid in the right way of doing business.

Technology: The role of technology is undeniable, especially in our current age. As many panelists noted, adhering to regulations and ensuring third-party compliance is crucial. Representing a third-party myself, I see the intricacies from both the bank’s perspective and our own, especially when global standards are considered. It’s not about merely complying, but actively ensuring businesses function ethically.

Data: This final pillar hasn’t been discussed as much, but it’s undeniably crucial. AI models, for instance, are only as good as the data fed into them. If the input is flawed, the output will reflect that. Ensuring accurate data collection, management, and verification is fundamental for any business operation. Especially for non-banking financial companies (NBFCs), it’s imperative to use accurate data, not only for regulatory reporting but also to provide a genuine picture to stakeholders.

Conclusion

The Elets 15th NBFC100 Tech Summit successfully brought together industry leaders, offering diverse perspectives on the regulatory challenges NBFCs face today. The consensus was clear: while navigating through regulations might seem daunting, the benefits of compliance, ensuring transparency, and focusing on the consumer are pivotal. The onus lies equally on regulatory bodies like the RBI and the NBFCs to ensure that the financial ecosystem remains robust, transparent, and inclusive.