Non-Banking Financial Companies (NBFCs) play a very important role in India’s financial system. They provide loans, credit, investment, and other financial services, especially to people and businesses that may not easily get support from banks. However, running an NBFC is not easy. It comes with strict rules and compliance requirements set by regulators.

Many NBFCs, especially new ones, make small but serious compliance mistakes. These mistakes can lead to penalties, restrictions on business, or even cancellation of the NBFC license. In this blog, we will explain common compliance mistakes NBFCs must avoid, using simple words and real-life understanding.

This guide is brought to you by Corpbiz, a trusted name in business and financial compliance services.

Understanding NBFC Compliance in Simple Terms

NBFC compliance means following all the rules, guidelines, and reporting requirements issued by the regulator, mainly the Reserve Bank of India (RBI). These rules cover:

• Registration and licensing

• Minimum capital requirements

• Regular filings and returns

• Customer protection rules

• Data security and risk management
  
  

Ignoring or delaying compliance can create serious legal and financial trouble.

Why Compliance Is Critical for NBFCs

Compliance is not just paperwork. It helps NBFCs:

• Build trust with customers and investors

• Avoid penalties and legal action

• Continue business operations smoothly

• Maintain good standing with regulators
  
  

Now let’s look at the most common compliance mistakes NBFCs make—and how to avoid them.

1. Delay in Regulatory Filings

One of the most common mistakes is missing deadlines for regulatory filings.

Common issues include:

• Late submission of RBI returns

• Not filing audited financial statements on time

• Ignoring annual or quarterly compliance reports
  
  

Why this is risky:

Late filings attract monetary penalties and raise red flags with the regulator.

How to avoid it:

• Maintain a compliance calendar

• Assign a dedicated compliance officer

• Take professional help for tracking deadlines

2. Not Maintaining Minimum Net Owned Fund (NOF)

Every NBFC must maintain a minimum Net Owned Fund (NOF) as prescribed by RBI.

Common mistakes:

• Not monitoring NOF regularly

• Using capital for non-permitted activities

• Poor financial planning
  
  

Impact:

If NOF falls below the required limit, RBI can cancel the NBFC registration.

Solution:

• Regularly review financial statements

• Keep sufficient capital buffer

• Get expert advice before major financial decisions
  
  

3. Poor KYC and AML Compliance

Know Your Customer (KYC) and Anti-Money Laundering (AML) rules are very important.

Typical errors:

• Incomplete customer KYC documents

• Outdated KYC records

• Weak transaction monitoring systems
  
  

Why it matters:

Poor KYC and AML compliance can lead to misuse of NBFC services for illegal activities.

Best practices:

• Follow RBI KYC guidelines strictly

• Update customer data regularly

• Use digital KYC tools and audits
  
  

4. Ignoring RBI Circulars and Updates

RBI regularly issues new circulars and guidelines.

Mistake:

Many NBFCs continue following old rules and miss new compliance requirements.

Consequences:

• Non-compliance penalties

• Business process mismatch with current laws
  
  

How to stay updated:

• Monitor RBI notifications

• Subscribe to compliance alerts

• Work with compliance professionals
  
  

5. Weak Internal Audit and Risk Management

Internal audits help identify risks early.

Common problems:

• No internal audit system

• Irregular risk assessments

• Ignoring audit findings
  
  

Risk involved:

This can lead to fraud, financial loss, and regulatory action.

Solution:

• Conduct periodic internal audits

• Implement strong risk management systems

• Act on audit observations quickly
  
  

6. Data Privacy and IT Security Lapses

NBFCs handle sensitive customer data.

Common compliance lapses:

• Poor data security systems

• No data protection policies

• Unauthorized access to customer information
  
  

Why it’s dangerous:

Data breaches can lead to legal action, loss of trust, and heavy fines.

Preventive steps:

• Use secure IT systems

• Implement cybersecurity policies

• Regular IT audits and staff training
  
  

7. Non-Compliance with Fair Practices Code

NBFCs must follow Fair Practices Code (FPC) issued by RBI.

Typical mistakes:

• Not sharing loan terms clearly

• Charging hidden fees

• Harsh recovery practices
  
  

Impact:

Customer complaints and RBI scrutiny increase.

How to avoid:

• Display FPC on website and offices

• Train staff on ethical practices

• Maintain transparent communication
  
  

8. Improper Outsourcing Management

Many NBFCs outsource operations like collections or customer support.

Common errors:

• No outsourcing agreement

• Not monitoring third-party activities

• Vendors violating compliance rules
  
  

Risk:

NBFC remains responsible for vendor actions.

Solution:

• Proper vendor agreements

• Regular vendor audits

• Strong monitoring framework
  
  

9. Not Updating Business Model with License Type

NBFCs must operate strictly within the activities allowed by their license.

Examples:

• Operating P2P lending without proper approval

• Issuing prepaid instruments without authorization
  
  

Correct approach:

Apply for the correct license such as:

• Apply NBFC License Online

• Apply PPI License Online
  

• P2P Lending License Online

• NBFC Account Aggregator License Online
  
  

Operating beyond license scope can result in license suspension.

10. Poor Board Governance and Documentation

NBFCs must maintain proper board structure and records.

Common mistakes:

• Irregular board meetings

• Missing board resolutions

• Poor documentation
  
  

Consequences:

Weak governance reduces regulatory confidence.

Best practice:

• Hold regular board meetings

• Maintain proper minutes and records

• Follow corporate governance norms
  
  

How Corpbiz Helps NBFCs Stay Compliant

Corpbiz provides end-to-end NBFC compliance services, including:

• NBFC registration and licensing

• Ongoing RBI compliance management

• Filing of returns and reports

• License modification and renewal

• Advisory for PPI, P2P, and Account Aggregator licenses
  
  

With expert support, NBFCs can focus on growth while compliance is handled professionally.

FAQs on NBFC Compliance

1. What happens if an NBFC fails to comply with RBI rules?

Non-compliance can lead to penalties, restrictions on business, or cancellation of NBFC registration.

2. Is it mandatory to file RBI returns regularly?

Yes, regular filing of returns and reports is mandatory for all NBFCs.

3. Can an NBFC offer new financial products without approval?

No, NBFCs must take prior approval if the activity is not covered under their existing license.

4. How often should internal audits be conducted?

Ideally, internal audits should be conducted at least once a year or as advised by regulators.

5. Can compliance work be outsourced?

Yes, but the NBFC remains fully responsible for compliance and must monitor the service provider.

Conclusion

Compliance is the backbone of a successful NBFC. Most compliance mistakes are not intentional but happen due to lack of awareness or poor systems. By understanding these common mistakes and taking timely action, NBFCs can avoid penalties and build a strong, trusted financial institution.

If you plan to Apply NBFC License Online, Apply PPI License Online, P2P Lending License Online, or NBFC Account Aggregator License Online, professional guidance is always recommended.

Author Profile

Atul Shukla
Atul Shukla is a seasoned legal and compliance expert with extensive experience in NBFC regulations, RBI compliance, and financial licensing. He has helped numerous businesses achieve smooth regulatory approvals and long-term compliance success.

Source - https://atulbusinessconsultant.substack.com/p/common-compliance-mistakes-nbfcs