RBI Intensifies Compliance Pressure On Regulated Entities: Study

The report suggests that the RBI has intensified its oversight measures, including more frequent and thorough inspections, deploying on-site inspectors at prominent NBFCs for ongoing supervision

This heightened oversight by the RBI over non-bank entities has led to a significant rise in regulatory actions

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Compliance has become a focal point, with Reserve Bank of India (RBI) penalties on regulated entities witnessing a fourfold increase from FY20 to FY23, according to a report by IIFL Securities released on Saturday. These penalties are primarily attributed to failures in adhering to prescribed processes, shortcomings in risk management practices, and lapses in safeguarding customer interests. 

This heightened oversight by the RBI over non-bank entities has led to a significant rise in regulatory actions.

According to the report, RBI Governor Shaktikanta Das emphasised that financial stability is considered a 'public good' attained through considerable efforts by the central bank. He reiterated the commitment to safeguarding and enhancing financial stability going forward.

The report suggests that the RBI has intensified its oversight measures, including more frequent and thorough inspections, deploying on-site inspectors at prominent NBFCs for ongoing supervision, and implementing a risk-based supervisory framework called SPARC. These initiatives enable the RBI to proactively address potential risks and take preventive measures.

“We also believe that the era of light touch regulations for FinTechs has ended with the central bank proposing to set up a FinTech SRO," states the report.

Furthermore, the RBI is reportedly considering a revision of its current penalty frameworks, potentially entailing higher penalty amounts, clawback of remuneration for senior management, or the imposition of additional capital charges. While the RBI's heightened and proactive supervision is beneficial for the long-term stability of the sector, investors should closely monitor any initial instances of regulatory admonishment, as they could indicate a trend toward more stringent actions by the central bank, as stated in the report. Anecdotally, there have been several instances in recent quarters of the RBI imposing fines or penalties on banks, NBFCs, and other regulated entities.

“We note that increasingly, these penalties are being imposed for contraventions of not only statutory compliances but also for failure to follow the required processes and continuous supervision. This is in addition to the annual RBI audit of these entities," the report said.