Global rating agency, Fitch on Tuesday said enforcement actions on various Indian non-bank financial institutions (NBFI) in recent years have raised the level of scrutiny on the sector’s governance practices. Standards have generally improved with tighter regulatory requirements and heightened market attention over the years, but compliance remains uneven across the industry, the agency said.

Governance and compliance issues can greatly diminish customer and market confidence, potentially undermining funding and business activities. Severe non-compliance may result in stringent regulatory sanctions, which can negatively affect the issuer’s franchise strength and heighten the risk of default, especially if liquidity buffers are thin, Fitch said.

Notable failures, such as Infrastructure Leasing & Financial Services Limited in 2018 and Dewan Housing Finance Limited in 2019, can be traced back in part to weak governance practices. The report identifies several governance risk factors common among such cases, including concentrated decision-making, complex accounting and group structures, frequent related-party transactions, aggressive growth strategies, and less-experienced management.

The Reserve Bank of India has introduced measures since 2021 to strengthen governance standards, such as requiring independent compliance functions, auditor rotation, and whistle-blower mechanisms, especially for larger NBFIs. However, the success of these measures hinges on effective implementation, with current practices still uneven across the sector. Recent regulatory actions on entities like IIFL Finance Limited (B+/Rating Watch Negative), JM Financial Products Limited, and ECL Finance Limited illustrate ongoing risks as regulators step up their enforcement actions.

Fitch’s sector risk operating environment assessment for Indian NBFIs incorporates the frequency of non-compliance events, but issuer-specific evaluations consider their respective management profiles, risk cultures, and governance practices.