Budget 2023: Indian shadow lenders call for rescue route from cumbersome compliance maze

Non-Banking Financial Companies in India are finding it difficult to adhere to the compliance obligations set by the Reserve Bank of India (RBI). The forthcoming Budget, scheduled to be announced on February 1, 2023, may address the issues, including the lack of an accurate and updated list of applicable compliance which remains a massive challenge for these shadow lenders.

According to a recent report by TeamLease Regtech, there are more than 200 industry-specific compliance requirements for an NBFC operating at a single location within the country. These requirements include maintenance of records, returns, and filings under the Prevention of Money Laundering Act, 2002, Prevention of Money Laundering (Maintenance of Records) Rules, 2005, and RBI Guidelines on Fair Practices Code for NBFCs.

Over 94 per cent of the compliance officers at NBFCs believe they don’t have the required visibility and control in their organization’s compliance program, as per the report. The compliance challenge also abates NBFCs expansion process. The ad-hoc, paper-based, and people-dependent processes fail to scale due to these compliance codes.

The report also stated that 92 per cent of the surveyed NBFCs agreed that they had missed at least one critical compliance during the 12-month period.
Possible solutions
The companies need to adopt digital processes that can help them create a transparent, accountable, and timely compliance environment. Only by adopting such digital processes can the companies stay on the right side of the law.

There are over 9000 registered NBFCs in India that provide credit services to the underserved sections of the economy. These institutions have been instrumental in deepening credit to the underbanked and the unbanked sections of society. The industry has seen great success in the vehicle, housing, and microcredit services.

TeamLease Regtech report emphasized that the tech-enabled solutions can help businesses gain greater control over their compliance management.

A compliance checklist should be made by the NBFCs that acts as a baseline which needs to be assessed and reviewed frequently to establish a robust compliance culture within the firm.

In addition, NBFCs can improve their overall operations by subscribing to national, real-time, and customized regulatory updates and by fully digitizing compliance management.

The report revealed that a company operating in a single state must comply with at least 621 compliances that involve more than 35 one-time registrations and approvals. As an institution grows its geographical footprint, the number of applicable compliances also rises in conjunction.

In 2022 alone, RBI alone issued more than 27 regulatory updates specific to the NBFC sector. This significant number of regulatory updates creates a compliance universe that is highly fluid.

Key demands for Budget 2023
The Indian NBFCs are looking towards Budget 2023 with anticipation as they seek to extend hassle-free credit access.

According to Shachindra Nath, Vice Chairman and Managing Director, U GRO Capital, the following demands by NBFCs should be taken into consideration in the Budget to enable higher participation and transform the liquidity scenario and cost of acquiring funds for small and medium sized NBFCs:

  • Active liquidity support system
  • Development of active secondary market of PTC
  • Lowering the loan limit for applicability of SARFAESI Act
  • Parity in Income Tax treatment on NPA provisions
  • Taxation of interest on NPAs on accrual basis

“The NBFC sector is one of the key drivers of growth in the Indian economy. It serves a section of society that is not usually catered to by commercial banks. The report delves into the regulatory ecosystem of NBFCs to give readers an insight into the complexity of the compliance landscape. It points out the challenges and inefficiencies in the present compliance processes adopted by these financial institutions. It also proposes recommendations that will allow these companies effectively manage their compliance obligations with the help of digital processes,” said Rishi Agrawal, CEO, and Co-Founder of TeamLease Regtech.

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