Background

Of India’s overall credit market, non-banking financial companies (“NBFCs”) command a 22% share[1], primarily catering to underserved sectors and providing retail loans, particularly to small businesses and households. As NBFCs have become systemically important for the economy, they have been subject to increased regulatory oversight by the Reserve Bank of India (“RBI”), evidenced by the introduction of scale-based regulations, which prescribe differential regulatory norms basis size and scale of the NBFC. This FIG paper explores the recent regulatory trends in this sector.

Key Trends

Registrations:

• The number of NBFCs registered with the RBI declined from 9,443 on March 31, 2023[2], to 9,306 on June 30, 2024[3].

• While some entities surrendered their certificate of registration (“CoR”), RBI cancelled many CoRs due to non-compliance with regulatory norms. Examples:
  • 10 CoRs were cancelled on supervisory grounds (additional details were not provided) on January 9, 2025[4].
  • 3 CoRs were cancelled due to irregular lending practices, viz. code of conduct in outsourcing, outsourcing of core functions, KYC violations, fair practices code and failure to conduct diligence on lending service provider, on July 8, 2024[5], and December 2, 2024[6].

• In terms of new NBFC registrations, RBI has granted CoR to group captive NBFCs, having access to the group’s existing customer/ vendor base and FinTech players in the lending space, who are seeking CoR to undertake lending on their own books.

• As there are 9000+ registered NBFCs, the RBI has been urging groups with multiple NBFCs under the same category to consolidate, to reduce regulatory oversight burden. Recently, the Burman Group acquired the Religare Group and RBI’s prior approval for this acquisition required the Burman Group to consolidate all existing NBFCs within both the Burman and Religare Groups[7].

• Given the decline in the number of overall NBFCs registered with RBI, this sector has seen brownfield entries, especially FinTechs and foreign private equity/ credit providers.

Enforcement:

• Between 2023 and 2025, the RBI has penalised 62 NBFCs[8] for regulatory non-compliance, with measures ranging from imposition of monetary penalty, warnings, and issuance of cease & desist orders from onboarding of customers/ disbursal of credit.

• The most common non-compliances were:

• Violation of KYC norms: Allotment of multiple customer identification codes instead of unique codes to each customer, failure to implement software for identification of suspicious transactions, periodic review of risk categorisation, failure to update customer KYC profile, etc.

• Outsourcing: Deficiencies in vendor agreements, especially relating to audit and inspection clause, outsourcing of core functions, failure to conduct audit of outsourced activity, etc.

• Reporting to credit bureaus: Failure to share credit information or share rectified information to credit bureaus within regulatory timelines.

• Interest rate and other charges: Lack of transparency in the charges applied to loans disbursed, non-disclosure of interest rates or risk gradation, and the reasoning behind different interest rates for various borrower categories, charging interest before the loan disbursement date, etc.

• Loan documentation and recovery agents: Failure to provide factsheets or convey terms in vernacular language, harassment by recovery agents, failure to abide by fair practice code, etc.

• Frauds: Fraud reporting to the RBI, with delays.

Borrowings by NBFCs:

• NBFCs rely heavily on borrowings from banks. It accounts for 39% of total NBFC borrowings[9]. To mitigate contagion risk, the RBI has recommended broad-basing of funding sources of NBFCs and reducing overall dependence on bank credit.[10]

• NBFCs are looking at alternate capital channels, including through foreign direct investment, co-lending partnerships, securitisation of loans into tradable securities or venture capital/ private equity infusions.[11]

• Evergreening of Loans: The RBI noticed that regulated entities (including NBFCs) are undertaking evergreening through investments into alternative investment funds (“AIFs”), which have the effect of substituting direct exposure to borrowers with indirect exposure, and stipulated:

• regulated entities are prohibited from making investments in any AIF scheme that have downstream investment, either directly or indirectly, in a debtor company of the regulated entity.

• if an AIF scheme in which a regulated entity is an investor makes a downstream investment in any debtor company, then the regulated entity must liquidate its investment within 30 days; and

•  if the regulated entity cannot liquidate its investments within 30 days, it must make 100% provision on such investments[12].

• Customer protections measures: With rise of digital lending and a significant portion of NBFCs loan portfolio comprising of retail loans[13], RBI has been cognizant of need of increased customer protection. Key new measures introduced by RBI include:  

• Key Fact Statement: providing a statement with all key facts pertaining to the loan and mandating no other charges to be imposed except as mentioned in the key fact statement[14];

• Penal Charges Circular: to ensure clear disclosures and no compounding of penal charges levied for default/ non-compliance with loan terms by NBFCs[15]; and

• Other directions: these covered fairness and transparency in charging interest rates[16], irregular practices in gold loans[17], and responsible conduct regarding release of moveable/ immovable property documents[18].

• Self-Regulatory Organization (“SRO”): The RBI has introduced a framework[19] for setting up SROs for all regulated entities, including NBFCs. The SROs will act as a bridge and assist the RBI in adopting sector-specific approaches and help with better governance.

Conclusion

The regulatory landscape for NBFCs in India is undergoing a transformation, with the introduction of scale-based regime, recent registration of NBFCs/ cancellation of CoRs, thereby highlighting the RBI’s intent of expanding the sector while ensuring robust oversight. Enforcement actions have intensified, particularly in key areas mentioned above. Overall, these regulatory trends signify a balanced approach towards fostering a stable, transparent, and customer centric NBFC sector.

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[1] CareEdge Rating document titled ‘NBFC-Navigating growth amidst regulatory changes’, dated August 9, 2024, available (here).

[2] Number of NBFCs surrendering licences to RBI at four-year high

[3] RBI list of NBFCs and Asset Reconstruction Companies, dated October 10, 2024, available (here).

[4] RBI Press Release dated January 9, 2025, available (here).

[5] RBI Press Releases dated July 8, 2024, available (here) and (here).

[6] RBI Press Release dated December 2, 2024, available (here).

[7] Religare Enterprises Limited’s stock exchange disclosure dated December 17, 2024, available (here).

[8] Regulatory actions on NBFCs with penalty above INR 1,00,000 and other regulatory actions have been included as part of this analysis.

[9] Speech by Mr. M. Rajeshwar Rao, Deputy Governor, RBI, at Mint BFSI Summit & Awards, on the topic ‘Challenges in Liability Management: Maintaining the Balance’, dated February 19, 2025, available (here).

[10] Remarks delivered by Mr. M. Rajeshwar Rao, Deputy Governor, RBI, at the NBFC Summit organised by Confederation of Indian Industry at Mumbai, dated February 9, 2024, available (here).

[11] Report titled ‘NBFCs in India: Growth and Stability’, February 2024, published by KPMG and Confederation of Indian Industry, available (here). 

[12] RBI’s circular titled ‘Investments in Alternative Investment Funds (AIFs)’, dated December 19, 2023, available (here).

[13] CareEdge Rating document titled ‘NBFC-Navigating growth amidst regulatory changes’, dated August 9, 2024, available (here).

[14] RBI’s circular titled ‘Key Facts Statement (KFS) for Loans & Advances’, dated April 15, 2024, available (here).

[15] RBI’s circular titled ‘Fair Lending Practice – Penal Charges in Loan Accounts’, dated August 18, 2023, available (here).

[16] RBI’s circular titled ‘Fair Practices Code for Lenders – Charging of Interest’, dated August 29, 2024, available (here).

[17] RBI’s circular titled ‘Gold loans – Irregular practices observed in grant of loans against pledge of gold ornaments and jewellery, dated April 29, 2024, available (here).

[18] RBI’s circular titled ‘Responsible Lending Conduct – Release of Movable / Immovable Property Documents on Repayment/ Settlement of Personal Loans’, dated September 13, 2023, available (here).

[19] RBI’s ‘Omnibus Framework for recognising Self-Regulatory Organisations (SROs) for Regulated Entities (REs) of the Reserve Bank of India’, dated March 21, 2024, available (here).