RBI Draft NBFC Compliance Function Directions 2026: New Governance Framework

The Reserve Bank of India (RBI) has released the Draft Reserve Bank of India (Non-Banking Financial Companies: Compliance Function) Directions, 2026. These directions seek to consolidate and formalise the compliance governance framework for NBFCs into a comprehensive regulatory structure, replacing the earlier piecemeal guidelines scattered across multiple circulars.

Why the RBI Is Strengthening NBFC Compliance

The NBFC sector in India has grown substantially over the past decade, with total assets under management crossing Rs 50 lakh crore. This growth has brought new risks, particularly around governance, consumer protection, and systemic stability. The RBI has repeatedly emphasised the need for robust compliance functions within NBFCs to match those already required of scheduled commercial banks.

The draft directions come alongside the broader tightening of NBFC regulation under the Scale Based Regulation framework. The RBI has also been actively cancelling registrations of non-compliant NBFCs, as seen in its cancellation of 35 NBFC registrations reported earlier.

Key Provisions of the Draft Directions

The draft directions introduce several mandatory requirements for NBFCs above a specified threshold. Every NBFC in the Upper Layer (NBFC-UL) and Middle Layer (NBFC-ML) of the Scale Based Regulation framework must appoint a Chief Compliance Officer (CCO) at a senior management level. The CCO must report directly to the Managing Director or CEO and must have independent access to the Board of Directors.

The compliance function must be independent of business lines and revenue-generating activities. NBFCs must establish a Compliance Department with adequate staffing, technological resources, and budgetary support. The CCO cannot hold any other operational or business-related role simultaneously.

Compliance Testing and Reporting Obligations

Under the draft directions, NBFCs must conduct periodic compliance testing to verify adherence to regulatory requirements. The CCO must submit a quarterly compliance report to the Board, covering the status of regulatory compliance, any breaches identified during the quarter, corrective actions taken, and pending regulatory submissions.

Additionally, NBFCs must maintain a compliance risk register that maps all applicable regulations to specific business processes, identifies the responsible officer for each requirement, and tracks the status of compliance. The register must be updated at least quarterly and reviewed by the Board annually.

Applicability and Timeline

The directions are proposed to apply to all NBFCs categorised under the Upper Layer and Middle Layer of the RBI's Scale Based Regulation framework. This includes systemically important NBFCs, deposit-taking NBFCs, and those with asset sizes above Rs 1,000 crore. Base Layer NBFCs with assets below the threshold will have a lighter compliance obligation.

The RBI has invited public comments on the draft directions within 30 days. Once finalised, NBFCs will likely have six months to implement the new compliance infrastructure. The directions are expected to be notified as final by September 2026.

Implications for the NBFC Sector

The draft directions will require significant investment in compliance infrastructure by mid-tier and upper-tier NBFCs. Many NBFCs currently rely on part-time compliance officers or outsource compliance functions, practices that will no longer be permitted under the new framework. The requirement for an independent CCO with board access represents a governance upgrade for the sector. For related regulatory changes, see the RBI KYC Compliance 2026 framework and the RBI NBFC Concentration Risk Management Directions.

NBFCs that fail to comply with the directions once notified may face supervisory action including restrictions on business expansion, penalties, and in severe cases, cancellation of registration. The RBI has indicated that compliance function effectiveness will be a key area of focus during its on-site inspections going forward.