There have been murmurs and discussions in the Indian finance space, especially in line with the nation’s apex bank paying attention to the regulations and compliance more than ever now. A point of contention often discussed at industry conferences has been the observation made by Reserve Bank of India (RBI) Governor Shaktikanta Das.
Das expressed that the NBFC sector to introspect and advised against following an unsustainable growth model and charging a higher interest rate. To many, such a hard-hitting statement could be equated with Bard’s “to be or not to be” predicament, highlighting the difficulty of operating in an environment as challenging as an NBFC faces. But to quote another philosophy – great powers always come at great responsibility. Perhaps, diligent compliance is the right approach. Why this anxiety and should it worry other NBFCs?
Regulation VS Innovation
Although the Governor appeared confident at the sidelines of a big industry get-together, a day ahead of the big presidential announcement in the US, the NBFC industry pondered over questions on regulation vs innovation. The governor at the conference corrected the narrative that the NBFC action “was not punitive, but corrective”. This was a well-nuanced decision and was considered after evaluating 9,400 NBFCs. However, at the same event, the Governor also clarified that it was the responsibility of the lending community to monitor the end-use of unsecured loans.
Despite initial fears, the RBI’s guidelines, analysis, and the role played by banks such as State Bank of India are under-rated. Under-rated because of the quality of guidance provided by the institutions. Secondly, concepts such as Fintech have been undeniably powerful in providing much-needed innovation. However, as the Wild West would have observed, an unchecked Fintech could induce several unknown challenges.
For instance, Signature Valley Bank was the fastest and promising bank of 2023 thanks to its adoption of cutting-edge technology and fintech disruption. Its innovation quotient did little to help avert the unfortunate bank run of last year. Or as the recent case in the Wild West – the confusion over the fintech player Yotta and Evolve Bank & Trust in California. Both cases justify a central bank’s loud call for transparency. And, certainly better innovation cannot come at the cost of regulation. In fact, regulation enables innovation.
Compliance for holistic financial growth and inclusion
NBFCs, in particular, play a vital role in financial inclusion by reaching underserved segments of society and filling credit gaps in the economy. However, without robust governance practices and adherence to regulatory norms, these institutions could face increased risks of misconduct, financial instability, and ultimately, a loss of credibility. By complying with regulations, NBFCs protect themselves from reputational damage and legal penalties while enhancing their credibility among investors and clients. Adherence to governance standards also ensures that financial firms align their operations with ethical practices, customer protection, and market stability.
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In the larger financial services sectors, compliance helps companies address emerging risks, such as cyber threats and data privacy concerns. As the industry evolves with technology-driven solutions, such as blockchain and digital lending platforms, regulatory compliance becomes even more crucial to prevent issues like data breaches, fraud, and systemic financial risks. Furthermore, stringent compliance frameworks require fintech firms to implement anti-money laundering (AML) and know-your-customer (KYC) policies, which are key to maintaining a secure financial environment.
Governance and compliance also attract investors who prioritise environmental, social, and governance (ESG) factors. In an increasingly ESG-oriented landscape, financial firms that demonstrate sound governance and compliance are more likely to secure investments from stakeholders focused on sustainable and ethical business practices. Effective governance practices and a commitment to regulatory standards not only promote stability and trust but also foster sustainable growth and resilience in an industry that must adapt to rapid technological and regulatory changes. For NBFCs, prioritising these principles is essential for future-proofing their operations and sustaining their contribution to economic growth and financial inclusion.
Moving ahead
NBFCs play a vital role in financial inclusion by reaching underserved segments of society and filling credit gaps in the economy. However, without robust governance practices and adherence to regulatory norms, the sector could face increased risks of misconduct, financial instability, and ultimately, a loss of credibility. There should therefore be no doubts that regulation would only strengthen the innovation-quotient in the sector, thereby instilling confidence and trust in the key stakeholders i.e. investors and regulators alike.
Views expressed by Pankaj Sharma, CEO, Religare Finvest
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