Reserve Bank introduces principles for mid, large NBFCs

Reserve Bank of India (RBI) on Monday introduced certain principles, standards and procedures for mid and large non-banking financial companies.

The revised regulatory framework for NBFCs, issued in October 2021, had indicated that such entities in the Upper Layer (NBFC-UL) and Middle Layer (NBFC-ML) would be required to have an independent Compliance Function and a Chief Compliance Officer (CCO).

The central bank said that as part of the overall structure for corporate governance, compliance function serves a critical role.

"Accordingly, it has been decided to introduce certain principles, standards and procedures for compliance function in NBFC-UL and NBFC-ML, keeping in view the principles of proportionality," it said in a circular on Monday.

NBFCs in the upper layer and middle layer should treat the prescriptions in the circular as a set of minimum guidelines only and accordingly frame their guidelines taking into account their corporate governance framework, the scale of operations, risk profile and organisational structure, among other factors, RBI said.

On scope and coverage of compliance function, RBI said that compliance function should ensure strict observance of all statutory and regulatory requirements for the NBFCs, including standards of market conduct, managing conflict of interest, treating customers fairly and ensuring the suitability of customer service.

"The board/board committee shall ensure that an appropriate compliance policy is put in place and implemented. Further, the board/board committee shall prescribe the periodicity for review of compliance risk," it said.

As per the circular, the NBFCs have to lay down a board-approved compliance policy clearly spelling out its compliance philosophy, expectations on compliance culture, structure and role of the compliance function, and the role of CCO, among others.

"The CCO shall be appointed for a minimum fixed tenure of not less than 3 years. However, in exceptional cases, the board/board committee may relax the minimum tenure by one year, provided appropriate succession planning is put in place," it said.

The CCO should be transferred/removed before completion of the tenure only in exceptional circumstances, with the explicit prior approval of the board/board committee.

Also, the CCO should be a senior executive of the NBFC with a position not below two levels from the CEO.

The circular further said that there should not be any 'dual hatting' -- the CCO should not be given any responsibility which brings elements of conflict of interest, especially any role relating to business.

Middle layer consist of all deposit-taking NBFCs irrespective of asset size; NBFCs with asset size of Rs 1,000 crore and above; and NBFCs undertaking certain type of activities.

The upper layer comprises those NBFCs which are specifically identified by RBI as warranting enhanced regulatory requirement.

The top ten eligible NBFCs in terms of their asset size will always fall in the upper layer, irrespective of any other factor.

NBFC-UL and NBFC-ML have to put in place a board approved policy and a compliance function, including the appointment of a CCO, based on the framework latest by April 1, 2023 and October 1, 2023, the circular said.