RBI issues Directions for Appointment of Internal Ombudsman by NBFCs

Ashish M. Shaji

13 Sep, 2022

The Reserve Bank of India recently issued a detailed guideline on appointment of an internal ombudsman by NBFCs (Non-Banking Financial Companies). The RBI had announced about the move of introducing an internal ombudsman mechanism for NBFCs in its Statement on Development and Regulatory Policies. In this article, we shall discuss some of the major highlights of the directions notified by the RBI in this regard.

Who is an Internal Ombudsman?

An Internal Ombudsman for NBFCs is one of the measures adopted by the RBI to strengthen the redressal mechanisms within the financial institutions. The internal ombudsman will examine customer complaints related to the deficiency in service that is partly or wholly rejected by the NBFCs.

Appointment of Internal Ombudsman by NBFCs

As per the RBI directions, the following NBFCs need to appoint the Internal Ombudsman:

• Deposit taking NBFCs with 10 or more branches;
• Non- Deposit taking NBFCs with an asset size of 5000 crore rupees and more and having public customer interface.

Further, the RBI also notified certain NBFCs that will be excluded from the applicability of this direction. They are as follows:

• Stand-alone Primary Dealer;
• Non-Banking Financial Company-Infrastructure Finance Company (NBFC-IFC);
• Core Investment Company (CIC);
• Infrastructure Debt Fund – Non-Banking Financial Company (IDF-NBFC);
• Non-Banking Financial Company – Account Aggregator (NBFC-AA);
• NBFC under Corporate Insolvency Resolution Process (CIRP);
• NBFC in liquidation;
• NBFC with only captive customers.

Eligibility Requirement for Appointment as an Internal Ombudsman by NBFCs

The following eligibility criteria must be fulfilled by a person to be appointed as an Internal Ombudsman (IO):

• Such person should be either retired or a serving officer not below the rank of Deputy General manager in any financial sector regulatory body/any other NBFC or bank;
• He must have necessary skills and an experience of 7 years (minimum) of working in areas like non-banking finance, banking, financial sector regulation/supervision or consumer protection;
• Such person should not have worked or be working in the group to which the NBFC belongs wherein he or she is being appointed as an internal ombudsman;
• Such person should not be more than 70 years of age at any point of time during the tenure as Internal Ombudsman.

You must note that the NBFC can appoint more than one IO as per the number of complaints obtained. Further, the principal nodal officer or the nodal officer liaising with the RBI ombudsman offices or any other official of the NBFC cannot act as the IO or vice versa.

Tenure of the Internal Ombudsman-

The IO tenure will be for a fixed period of not less than 3 years and not more than 5 years. The IO will not be eligible for reappointment or for any extension of his/her tenure in the same NBFC.

The NBFC need to undertake fresh appointment in advance to fill up the vacancy before the tenure of the incumbent IO expires, and the post of the IO should not remain vacant.

The IO should not be removed without the explicit approval of the RBI. If the vacancy arises due to the reasons that are beyond the control of NBFC, then the NBFC should appoint new IO within three months from the date of vacancy arising.

What will be the roles and responsibilities of the Internal Ombudsman?

The IO shall:

• Deal with complaints that NBFCs have examined and have partly or wholly rejected.
• Review complaints that NBFCs have partly/wholly rejected before conveying the final decision of the NBFC to the complainant.
• Examine complaints based on records available with NBFC, including documents submitted by the complainant (if any), and comments, clarifications furnished by NBFC to the specific queries of IO.
• Hold meetings with the functionaries or departments of NBFC and seek record or document available with the NBFC, which is required to examine the complaint or decision.
• Periodically analyze pattern of complaints obtained against the NBFCs and provide inputs to the NBFC for policy intervention, if any.
• Report to the managing director/CEO of the NBFC administratively and to the board functionally.

The IO shall not handle:

• Complaints related to fraud, misappropriation etc. except for those arising from deficiency in service, if any, from NBFC;
• Complaints/references pertaining to internal administration, human resources, pay and emoluments of staff;
• Complaints which have been decided by or is pending in other fora such as Consumer Disputes Redressal Commission, Courts etc;
• References in nature of suggestions and commercial decisions of NBFC.

The RBI further stated in its notification that NBFCs must formulate a SOP approved by its board and form a system of auto-escalation to the IO for taking final call of all complaints that the NBFCs internal grievance redress mechanism has rejected, partly or wholly.

Reporting to RBI

The NBFC should establish a periodic reporting system of information to the Reserve Bank of India^[1]. The IO will be required to furnish periodic reports to the NBFC board, preferably a quarterly intervals but not less than bi-annually. The internal audit system of NBFCs shall monitor the implementation of this direction.

Conclusion

The Reserve Bank issued the notification on appointment of internal ombudsman by NBFCs on 15^th November 2021 which covers the qualification and tenure of the IO, its roles and responsibilities, procedural guidelines for NBFCs regarding the complaints referred to the ombudsman, audit and oversight mechanism for IO. The appointment of internal ombudsman by NBFCs will act as a check on their decision. Moreover, it can improve customer experience, including grievance redress practices. IO will be an addition to the present grievance redressal mechanism of an NBFC.

Read our article:All about the Newly Launched Integrated Ombudsman Scheme (RBI)