On November 15, 2021, the Reserve Bank of India (RBI) introduced an Internal Ombudsman (IO) mechanism for certain categories of Non-Banking Financial Companies (NBFCs) that have a higher customer interface.
- In October 2021, RBI had mentioned its decision to introduce the IOS for NBFCs in the Statement on Developmental and Regulatory Policies as part of the Monetary Policy Statement.
Key Facts about NBFCs IO Mechanism:
a.Eligibility Criteria for NBFCs:
RBI has directed Deposit-taking NBFCs (NBFCs-D) with 10 or more branches and Non-Deposit taking NBFCs (NBFCs-ND) with asset size of Rs 5,000 crore and above to appoint an IO at the apex of their internal grievance redress mechanism within 6 months from the issuance of direction.
b.Exclusion:
i.NBFCs that are excluded from the applicability of the IO direction include – Stand-alone Primary Dealer, NBFC- Infrastructure Finance Company (NBFC-IFC), Core Investment Company (CIC); Infrastructure Debt Fund – NBFC (IDF-NBFC), NBFC – Account Aggregator (NBFC-AA), NBFC under Corporate Insolvency Resolution Process, NBFC in liquidation, and NBFC having only captive customers.
ii.The NBFC that are covered by this direction will continue to have an IO for a period of 3 years after the company falls below the thresholds (i.e. NBFCs with 10 or more branches/with asset size of Rs 5000 crore or more).
c.Appointment of the IO:
RBI directs NBFCs registered with RBI under Section 45-IA of the RBI Act, 1934, fulfilling the eligible criteria for NBFCs, to appoint an IO.
i.Eligible Criteria for Appointment:
- The person should be either a retired or a serving officer (not below the rank of Deputy General Manager or equivalent) in any financial sector regulatory body/any other NBFC/bank with a minimum of 7 years of working experience.
- The person should not have worked/be working in the NBFC in which he/she is being appointed as IO.
- Age: The person appointed as IO should not be above the age of 70 years during the tenure as IO.
ii.The NBFC may appoint more than one IO depending on the number of complaints received/branch network.
iii.Tenure: The IO could be appointed for a fixed term of not less than 3 years, but not exceeding 5 years. The IO was not eligible for reappointment or for extension of tenure in the same NBFC.
d.Role and responsibilities of the IO:Â The IO could deal only with the complaints that have already been examined by the NBFC but have been partly or wholly rejected by the NBFC i.e. the IO will not handle complaints received directly from the customers or members of the public.
RBI issued the directions in exercise of the powers conferred by Section 45 (L) read with 45 (M) of the RBI Act, 1934.
Note – The implementation of the IO mechanism will be monitored by the NBFC’s internal audit system apart from regulatory oversight by RBI.
-RBI Introduced SBR Framework for NBFCs
On October 22, 2021, RBI introduced a revised regulatory framework for NBFCs named ‘Scale Based Regulation’ (SBR) to regulate the NBFCs based on their size, activity, complexity, and interconnectedness within the financial sector.
- Prior to this framework, the NBFCs were governed and regulated under RBI Act (1934) Companies Act, NBFC Prudential Norms (Reserve Bank) Directions (2007), Prevention of Money Laundering Act, Know Your Customer (KYC) Guidelines, and Guidelines on Fair Practices Code.
- Additionally, SEBI (Securities and Exchange Board of India) Act (1992), National Housing Bank Act, Chit Funds Act, Insurance Act etc. also apply, subject to the nature of the business carried out by the NBFC.
Note – NBFCs are the largest net borrowers of funds from the financial system and banks provide a substantial part of the funding to NBFCs.
Recent Related News:
In October 2021, the RBI issued draft directions for implementing the Basel III capital adequacy norms for All India Financial Institutions (AIFIs) that are regulated by RBI viz, Exim Bank, NABARD (National Bank for Agriculture and Rural Development), National Housing Bank (NHB), and SIDBI (Small Industries Development Bank of India).
About Reserve Bank of India (RBI):
Establishment – 1st April 1935
Headquarters – Mumbai, Maharashtra
Governor – Shaktikanta Das
Deputy Governors – Mahesh Kumar Jain, Michael Debabrata Patra, M. Rajeshwar Rao, T. Rabi Sankar
