NBFCs need to strengthen risk management framework: Report

With the recent regulatory changes and the government's initiatives altering the operating mechanism, a report Thursday suggested that there is a need for non-banking financial companies (NBFCs) to strengthen their risk management framework.

Risk management is paramount for NBFCs, given the implications on the ability to successfully raise funds from the market and potentially enlist on secondary markets through an IPO in the medium to long term, the joint report by Assocham and PwC said.

"With recent events increasing the scrutiny on NBFCs and their operations, it is imperative for players to build robust risk and governance models as they grow their lending business," the report said.

It further said that NBFC lenders must develop and implement risk management frameworks to pro-actively detect, manage and mitigate internal and external risk types.

Some of the risks that these players need to manage include credit risk, vendor risk, conducting periodic compliance reviews, performing quality control checks to ensure process adherence and ensuring information integrity.

"NBFC lenders must guard against information leaks, which could potentially jeopardise the customer's financial security and tarnish the lender's image," the report said.

Rising customer expectations and the proliferation of digital business models, according to the report, have accelerated the need for existing NBFC incumbents to transform their operations, while forcing new entrants to rethink their entry strategy.

The report comes amid the ongoing crisis with Infrastructure Leasing & Finance Services (IL&FS), where the NBFC and its subsidiaries, reeling under severe liquidity crisis, have defaulted on several debt repayments recently.

This led to the Centre stepping in and taking control of the management of IL&FS, to check a contagion that could have impacted the financial sector.