NBFC Committees Framework

1. The Critical Need for Board Committees

The need for specialised Board committees arises from the inherent nature of NBFC operations. Historically, NBFCs have faced challenges relating to transparency, making it difficult for creditors and shareholders to effectively monitor daily operations. Inadequate risk management in a financial institution can have far-reaching systemic consequences.

By constituting specialised committees, an NBFC ensures:

• Specialised Oversight: Delegation of responsibilities to members with relevant expertise
• Enhanced Transparency: Reduction of information asymmetry between management and stakeholders
• Risk Mitigation: Early identification and management of operational and market risks
• Regulatory Compliance: Alignment with oversight requirements of RBI and the Ministry of Corporate Affairs

2. The Three Fundamental Board Committees

While the Board of Directors retains ultimate authority, RBI Directions mandate the constitution of the following core committees to manage critical governance functions:

1. Audit Committee: Ensuring financial integrity and internal controls
2. Nomination and Remuneration Committee (NRC): Evaluating leadership quality and “fit and proper” status
3. Risk Management Committee: Identifying and mitigating integrated risks

3. Audit Committee – Ensuring Financial Integrity

3.1 Purpose and Objective

The Audit Committee is a cornerstone of the NBFC corporate governance framework. Its primary objective is to ensure financial integrity, transparency, and the effectiveness of internal control systems, while safeguarding stakeholder interests.

3.2 Legal and Regulatory Basis

The Committee is constituted under Section 177 of the Companies Act, 2013 and the Reserve Bank of India (Non-Banking Financial Companies – Governance) Directions, 2025.

3.3 Constitution and Leadership

• Minimum of three directors as members
• Majority, including the Chairperson, must be financially literate
• Authority to investigate matters within its scope and seek external professional advice

3.4 Powers and Responsibilities

• Operate under Board-approved terms of reference
• Review financial statements and audit reports
• Recommend appointment and remuneration of statutory auditors
• Monitor auditor independence and internal control systems
• Approve or modify related party transactions, where applicable

3.5 Information System Audit & Vigil Mechanism

• Ensure periodic Information System Audits to assess technology and operational risks
• Oversee a whistleblower mechanism with safeguards against victimisation

4. Nomination and Remuneration Committee (NRC)

The NRC ensures that the leadership of the NBFC meets the highest standards of competence, integrity, and accountability, with a strong focus on the RBI-prescribed “fit and proper” criteria.

• Minimum three Non-Executive Directors
• At least 50% Independent Directors
• Ongoing due diligence of directors and senior management
• Recommendation of remuneration aligned with prudent risk management

5. Risk Management Committee – Safeguarding Sustainability

The Risk Management Committee (RMC) is responsible for managing integrated risks including credit, market, and operational risks, ensuring financial stability and long-term sustainability.

• Identification and monitoring of all material risks
• Review of risk management policies and frameworks
• Coordination with ALCO for asset-liability management
• Monitoring compliance with RBI risk norms

NBFCs with asset size exceeding ₹5,000 crore are required to appoint a Chief Risk Officer (CRO), who functions independently and reports directly to the MD & CEO or the RMC.