How RBI Is Strengthening The NBFC Compliances For The Benefit Of Indian Consumers

Indian NBFCs are at the forefront of driving new credit disbursals for the underserved and marginalized communities. Over the years, the NBFC sector has evolved significantly in terms of size, operations, technological sophistication and product and service diversification. There are approx. 10,000 NBFCs across all categories with a varied range of products and services. The non-banking sector is moving on an exponential growth trajectory and has assets worth over ₹54 lakh crores, equivalent to about 25% of the asset size of the banking sector. 

In recent years, the sector has also witnessed the advent of many FinTech players leveraging technology to adopt disruptive business models. With the influx of non-traditional players aiming for short-term gains, the risk of unethical practices, non-adherence to regulations and consumer exploitation has increased. In FY 2019-20, complaints against NBFCs rose by 387%. In light of mounting grievances, RBI has framed various policy guidelines for the benefit and protection of Indian consumers. 

Implementation of Fair Practices Code (FPC)

To immunise borrowers from unfair lending practices and hold NBFCs to a higher ethical standard, RBI has implemented the Fair Practices Code for NBFCs. Accordingly, each NBFC must establish an FPC covering general guidelines for loan application, interest rates/fees/penalty, post disbursal supervision and other terms and conditions. Additionally, they should inform the ‘all-in-cost’ of credit so consumers can compare the rates with other sources of finance. Furthermore, NBFCs should avoid undue harassment of consumers such as persistent bothering at odd hours or use of muscle power while recovering loans.

Strengthening grievance redressal machinery

Consumer complaints represent the voice of consumers and to strengthen their voice, RBI has issued a comprehensive framework for an internal grievance redressal mechanism. To ensure consumer complaints are heard and resolved quickly and effectively, each NBFC is required to define an appropriate grievance redressal mechanism in accordance with the RBI guidelines. Additionally, all NBFCs should appoint a Grievance Redressal Officer to oversee the complaint resolution mechanism and ensure that consumer complaints are dealt with fairly and efficiently. 

Internal Ombudsman (IO) scheme for NBFCs

Launched on November 15, 2021, the Internal Ombudsman Scheme for NBFCs is directed toward the fair treatment of consumers and providing them avenues of grievance redressal. Accordingly, all deposit-taking NBFCs with 10 or more branches and all non-deposit-taking NBFCs with asset size exceeding ₹5,000 crores must have a public customer interface. All such NBFCs are obligated to appoint an Internal Ombudsman (IO) at the top of their internal grievance redressal mechanism to assess and evaluate the partly or wholly rejected complaints. 

Regulation of excessive interest charged by NBFCs

Bearing the brunt of inherent risks such as excess leverage, inadequate statutory recovery tools, over-reliance on wholesale funding etc., several NBFCs feel compelled to charge high-interest rates. Although there is no clear demarcation of exorbitant interest but to benefit Indian consumers to avail credit at reasonable rates, RBI has advised NBFCs to establish suitable internal principles and procedures for defining interest rates, processing and other charges. Accordingly, NBFCs should have an appropriate interest rate policy that is circulated on their website to elevate the confidence and transparency of consumers. 

Administering outsourcing of financial services

To minimise costs, achieve performance goals and access expertise unavailable internally, NBFCs are increasingly outsourcing. RBI has dictated comprehensive guidelines for NBFCs to ensure that any outsourcing activity does not diminish their obligations and holds them responsible for the actions of their service providers (selling or recovery agents). NBFCs must ensure customer data privacy and security in the hands of service providers. 

Additionally, all service providers must adhere to a Board-approved code of conduct to ensure fair treatment of the borrowers. NBFCs and their agents must never resort to intimidation or harassment of any kind in their debt collection efforts, including acts intended to humiliate publicly or invade the debtor’s privacy, making hostile or anonymous calls or false and misleading representations.  

Mitigating cybersecurity risks

In light of the accelerating digital transformation and mounting risks associated with Information Technology (IT), the RBI has prescribed appropriate guidelines to prevent data breaches that may have implications for consumer protection. As a result, RBI has suggested a slew of measures that every NBFC must undertake to ensure the stability and security of their IT systems. By following these guidelines and elevating the soundness of their cybersecurity systems, NBFCs can prevent rampant incidents of cyber breaches that often have serious repercussions on consumer protection and trust. 

Wrapping Up

Putting in place an elaborate grievance redressal machinery, implementing Fair Practices Code, regulating interest rates and mitigating cybersecurity risks all accentuate consumer protection. But regulations and guidelines alone will not suffice. Consumer protection against unfair and deceitful practices must become the priority of every NBFC and permeate the culture and ethos of every organization.