Operating Costs of Compliance in NBFCs

Executive Summary

Over the past several years, Indian NBFCs have witnessed a marked transformation in their compliance functions, driven primarily by escalated regulatory oversight and evolving risk management requirements. This report analyzes the current state of compliance cost structures, technology adoption, and resource allocation within the sector, offering a data-driven perspective based on publicly available industry reports, regulatory disclosures, and empirical benchmarks.

Key findings include:

• Rising Compliance Expenditure: NBFCs allocate, on average, between 1.6% and 4.2% of their operating costs to compliance-related activities. This upward trend is primarily driven by heightened requirements under the RBI’s Scale-Based Regulatory Framework and increasing complexities in KYC/AML obligations.
• Budget Composition: Expenditures are predominantly allocated to human capital and advisory services (approximately 45%), with technology investments (around 22%) and reporting infrastructures (18%) comprising significant components of overall compliance spending.
• Technology and Automation: Despite varying levels of technological integration, those NBFCs that have adopted advanced GRC platforms demonstrate a notable reduction in manual effort and enhanced responsiveness during regulatory inspections.
• Cost of Non-Compliance: Penalties and remedial costs have underscored the financial and reputational risks of inadequate compliance frameworks, with recent enforcement actions highlighting the critical importance of proactive investment in systems and processes.
• Strategic Considerations: The findings indicate that NBFCs are at a crossroads where the shift from a reactive to a proactive, technology-enabled compliance regime will not only mitigate risks but also serve as a strategic differentiator in a competitive market.

This report establishes a benchmark for understanding the true cost of compliance within the NBFC sector and provides targeted recommendations for senior decision-makers to optimize their compliance functions in an increasingly challenging regulatory setup.

Introduction

The financial services landscape in India has undergone significant regulatory tightening in recent years, with Non-Banking Financial Companies (NBFCs) emerging as a focal point for supervisory scrutiny. As key enablers of credit flow in under-served and high-growth segments, NBFCs are increasingly being held to standards that mirror those applicable to traditional banks- particularly under the RBI’s Scale-Based Regulatory (SBR) Framework, introduced to strengthen risk governance, resilience, and operational discipline across the sector.

In parallel, the compliance function has evolved from a narrow regulatory checklist into a strategic business capability—one that demands both depth (clause-level tracking, cross-departmental coordination) and agility (real-time reporting, dynamic risk assessment).

Against this backdrop, NBFCs are now grappling with two fundamental challenges:

1. Escalating Compliance Burden: The volume, frequency, and granularity of regulatory expectations have intensified, spanning themes such as KYC/AML, outsourcing arrangements, IT system resilience, fair lending practices, and board governance.
2. Cost-Risk Trade-Off: While the cost of building mature compliance infrastructure is rising, the potential cost of failure—through regulatory penalties, reputational damage, or business disruption—has become substantially higher.

In this environment, questions around “how much should NBFCs invest in compliance”, “what does a best-in-class compliance spend look like”, and “how technology is altering the compliance cost curve” have become more urgent than ever.

Yet, benchmarking data specific to NBFCs remains fragmented and under-reported, limiting the ability of CXOs to make informed, forward-looking decisions.

This report aims to bridge that gap. By distilling publicly available financial data, disclosures, and industry research, we offer a high-level benchmarking view of compliance costs across NBFCs—mapped to sector size, scale, and maturity.

Our objective is to empower decision-makers with visibility into sector norms, deviations, and emerging best practices for compliance cost optimization.

Market Data: Compliance Cost Benchmarks for NBFCs

While comprehensive, clause-level compliance cost data remains limited in the public domain, emerging patterns from financial disclosures and regulatory penalties reveal directional benchmarks across asset classes and NBFC scales.

1. Compliance Spend as % of Operating Costs

Based on the financial disclosures of select publicly listed NBFCs across the last 12 months, we observe the following indicative ranges:

Note: Estimates are based on line-item classification of “professional fees,” “legal & compliance,” and “consulting” expenses in audited financial statements. Actual compliance allocations may be higher where costs are embedded in cross-functional roles.

2. Penalty Heatmaps

Penalties remain an indirect but important indicator of compliance maturity. Over FY24, the RBI levied penalties on over 80 NBFCs for breaches spanning KYC, reporting delays, loan recovery practices, and governance lapses.

Mid-size NBFCs accounted for the majority of repeat violations, indicating gaps in internal monitoring systems rather than policy absence.

3. Technology Adoption as a Cost Multiplier

NBFCs investing in compliance automation—particularly clause tracking, real-time MIS dashboards, and audit readiness systems—report lower recurring manpower costs and faster internal control closures.

Technology-Mature NBFCs (Top 15 UL/ML players): Estimated 20–30% lower YoY increase in compliance cost despite regulatory expansion.

Manual/Hybrid Compliance NBFCs:  Higher operational cost and reactive posture to inspections or audit queries.

4. External vs Internal Spend Split

Larger NBFCs (UL, ML): Typically 60–70% of compliance costs are internal (dedicated compliance teams, cross-functional reviews).

Smaller NBFCs (BL): External consultants, CA firms, and legal advisors account for up to 50% of compliance-related expenses.

Understanding how compliance challenges vary across entity types (NBFCs vs Banks) and within NBFC tiers (Tier-1 vs Tier-2) reveals important asymmetries in regulatory burden, resource allocation, and risk exposure.

1. NBFCs vs Banks: Structural Differences in Compliance Complexity

*Clause count estimates include core banking/compliance circulars, master directions, cyber and outsourcing norms, and thematic guidance.

Implication: While banks are more stringently regulated, they have matured internal compliance infrastructure. NBFCs—especially fast-scaling ones—face growing expectations but lack institutionalized systems and muscle memory.

2. Tier-1 vs Tier-2 NBFCs: Diverging Maturity Levels

Tier Definitions (Internal Classification):

• Tier-1: ₹  10,000 Cr+ AUM, middle or upper layer under RBI’s SBR.
• Tier-2: ₹  1,000–5,000 Cr AUM, mostly middle or base layer.

Implication: Tier-2 NBFCs face the same directional regulatory expectations as Tier-1 peers, but with thinner teams, lower budgets, and fewer tools—widening the compliance execution gap.

3. Risk Exposure Comparison: Execution vs Design Gaps

Regulatory posture is shifting from a design-evaluation mindset to an execution-verification model. NBFCs without real-time execution control systems face heightened risk—even if their policy frameworks appear compliant.

As compliance expectations scale, technology is no longer optional—it is a core enabler of operational resilience, regulatory responsiveness, and cost control. Yet, adoption across NBFCs remains uneven.

1. Current Technology Adoption Patterns

Only ~10–12% of NBFCs surveyed use dedicated GRC or compliance tools. Among those, most are Tier-1 or backed by large financial groups.

2. Measurable Efficiency Gains from Tech Enablement

Organizations that have adopted structured compliance platforms report material gains across several dimensions:

Estimated ROI: For a mid-sized NBFC (~₹  5000 Cr AUM), digitizing compliance tracking saves 500–800 person-hours annually, enabling ~15–20% cost reduction in compliance execution.

3. Bottlenecks to Adoption

Despite the benefits, adoption lags due to:

• Budget Allocation Challenges: Compliance not always seen as a ‘tech-first’ domain.
• Lack of Internal IT Capacity: Especially in Tier-2 NBFCs and first-generation firms.
• Change Management Hurdles: Reluctance to replace legacy, spreadsheet-driven systems.
• Fragmented Solution Landscape: Few purpose-built tools; most are generic workflow platforms.

Strategic Implications

The evolving regulatory landscape and increasing supervisory expectations—particularly under RBI’s Scale-Based Regulatory (SBR) framework—have shifted compliance from a functional requirement to a strategic lever. The following implications merit serious consideration at the leadership level:

1. Compliance Maturity is Now a Strategic Risk Indicator

NBFCs, especially in the Middle and Upper Layers, are no longer assessed solely on financial performance.

Regulatory supervisors are evaluating the institutionalisation of compliance systems—execution discipline, internal control environments, and traceability of actions taken.

Implication: Institutions lacking clause-level control frameworks or systematic task-to-owner alignment risk being classified as governance-weak—adversely impacting supervisory assessments, investor confidence, and even capital access.

2. Fragmented Execution Models Pose Structural Risk

Despite documented policies and audit frameworks, execution across many NBFCs remains decentralised and person-dependent. This results in limited visibility, inconsistent adherence, and high audit-time effort.

Implication: Fragmented models are increasingly incompatible with the regulator’s expectation of “demonstrable compliance.” Firms must invest in unified systems that allow real-time tracking, escalation handling, and audit-readiness by design.

3. Technology is No Longer Optional for NBFC Compliance

A significant number of regulatory tasks—especially those triggered by events (e.g., change in shareholding, directorship changes, fund flow declarations)—require precise timing and coordinated ownership. Manual systems introduce latency and error.

Implication: Absence of a digitised compliance execution infrastructure increases both operational risk and reputational exposure. For medium-to-large NBFCs, this gap is no longer defensible before the Board or regulator.

4. Supervisory Focus is Moving from Policy to Proof

There is a discernible shift in regulatory engagement—from reviewing the adequacy of policies to examining how obligations are translated into monitored, traceable action at the operational level.

Implication: The ability to furnish granular, timestamped compliance artefacts (not merely narratives) is becoming critical. Institutions must prepare for a regulatory environment where “show me how you executed” replaces “show me your intent.”

5. Compliance Infrastructure as a Differentiator

As governance becomes a key axis of institutional trust, compliance maturity is being increasingly factored into credit evaluations, due diligence, and rating decisions—particularly for NBFCs seeking to scale or raise capital.

Implication: Institutions that treat compliance as a strategic pillar—supported by data systems, ownership clarity, and continuous assurance—will command long-term advantages in credibility, market access, and regulatory comfort.

Conclusion and Recommendations

The compliance function within NBFCs is undergoing a structural transformation. What was once treated as a policy-led, periodic responsibility is now expected to operate as an always-on, execution-focused control layer.

This shift has significant implications for how institutions structure their compliance operations, invest in technology, and assess organizational readiness.

To remain ahead of supervisory expectations and peer benchmarks, NBFCs—particularly those in the Middle and Upper Layers—must take a proactive and systems-first approach. Based on our assessment and market observations, we offer the following recommendations:

1. Institutionalize Clause-Level Control Frameworks

Move beyond policy documents and audit checklists. Establish a granular, clause-mapped control register that directly links regulatory obligations with internal workflows, owners, timelines, and artefact requirements.

Recommendation: Implement a centralized compliance control system that offers real-time visibility across all regulatory obligations, with ownership clarity and escalation protocols.

2. Strengthen the Second Line Through Technology

Many second-line teams remain overly reliant on manual trackers, emails, and post-facto validations. This not only increases risk but limits the ability to provide timely assurance to the Board and regulator.

Recommendation: Equip the compliance and risk control functions with workflow tools that allow proactive monitoring, periodic attestations, and automated evidence capture.

3. Embed Audit-Readiness by Design

With regulators increasingly asking for proof of execution, compliance infrastructure must be designed for defensibility—where every action taken is timestamped, owned, and retrievable.

Recommendation: Build systems that generate audit logs, trail artefacts, and compliance dashboards—capable of supporting both internal reviews and regulatory inspections.

4. Prioritize Cross-Functional Alignment

Compliance obligations often cut across departments—legal, operations, finance, IT. A fragmented approach leads to accountability gaps and missed deadlines.

Recommendation: Create cross-functional compliance maps that define task flows, dependencies, and communication protocols across teams.

5. Treat Compliance Infrastructure as Strategic Capital

Forward-looking NBFCs are beginning to treat their compliance systems as a differentiator—important not just for risk mitigation, but for enhancing governance credibility, investor confidence, and market standing.

Recommendation: Promote compliance in the strategic roadmap. Invest in people, processes, and platforms that shift the function from reactive to anticipatory.