RBI NBFC Governance Directions 2025: What Every NBFC Board Must Know and Do

On 28 November 2025, the Reserve Bank of India issued the Non-Banking Financial Companies Governance Directions 2025. For the first time in NBFC regulatory history, governance has its own standalone framework extracted from scattered provisions across multiple master directions and consolidated into a single, enforceable document.

RBI NBFC Governance Directions 2025 apply to Base, Middle, and Upper Layer NBFCs. However, the obligations vary according to the regulatory layer. Furthermore, the RBI issued its first enforcement action for governance non-compliance in March 2026. It penalised an NBFC for improper senior management compensation treatment. As a result, the framework is now operational, enforceable, and under active regulatory scrutiny. This guide covers the material obligations.

What the NBFC Governance Directions 2025 Introduce

Previously, the RBI embedded NBFC governance requirements across the Scale-Based Regulation master directions, the Credit Facilities Directions, and various circulars. However, the Governance Directions 2025 now consolidate these requirements into a single framework. As a result, the framework introduces three new governance accountability measures:

• Explicit Board oversight obligations: the Board is now directly accountable for specific credit, compliance, and operational decisions, not just for setting policy. The Directions specify which decisions require Board approval and which require specific committee involvement.
• Named Key Managerial Personnel (KMP) requirements: NBFCs above the specified thresholds must appoint named KMPs. Each role must have defined responsibilities and reporting lines.They must also appoint a Chief Compliance Officer (CCO) who reports directly to the Board.
• Compensation governance: variable pay structures for senior management must include malus and clawback provisions. The RBI took enforcement action against an NBFC in March 2026. It penalised the company for paying the entire variable compensation of senior management as a single upfront payment. This action shows that the RBI is actively monitoring compliance.

Board Composition Requirements Under the Directions

Board composition requirements under the Governance Directions scale with the NBFC’s regulatory tier.

For Middle Layer and Upper Layer NBFCs, the Directions specify:

• At least one-third of Directors must be Independent Directors (IDs). For Upper Layer NBFCs, independent directors must form the majority.
• At least one Director with relevant expertise in credit risk management or financial sector regulation.
• At least one Director with expertise in information technology or cybersecurity reflecting the RBI’s increasing focus on technology risk in NBFC operations.
• Maximum tenure of eight years for independent directors (including existing tenures).
• At least two Directors must be women (for NBFCs above the specified asset threshold).

Base Layer NBFCs face lighter Board composition requirements but must still ensure the Board is functional, meets at least four times per year, and has at least one Director with relevant financial sector experience.

Key Managerial Personnel and the Chief Compliance Officer

The Governance Directions mandate specific KMP positions for NBFCs above defined thresholds. The most significant addition:

Chief Compliance Officer (CCO): for Middle Layer NBFCs above Rs 1,000 crore in assets and all Upper Layer NBFCs, a dedicated CCO with a direct reporting line to the Board (or the Board-level Audit Committee) is mandatory. The CCO cannot report to the business lines they are monitoring. The CCO’s appointment and removal require Board approval.

The Governance Directions explicitly require the CCO to operate independently. They also establish the position as an internal check on regulatory compliance, free from commercial pressure. An NBFC where the compliance function reports to the MD/CEO, who may also have commercial targets, does not meet the spirit of this requirement.

Other mandated KMP for Upper Layer NBFCs: Chief Risk Officer (with direct Board access), Chief Financial Officer, and Company Secretary, all with specified qualification requirements and independence provisions.

Compensation: Malus and Clawback Requirements

Compensation governance is the most operationally specific new requirement in the Governance Directions and the one that triggered the first enforcement action in March 2026.

Variable compensation for senior management and material risk takers must:

• Include a deferral component: a minimum percentage of variable pay must be deferred over at least three years. Paying 100% of variable compensation in Year 1 for Year 1 performance does not align compensation with the multi-year risk outcomes of lending decisions.
• Include malus provisions: variable compensation can be reduced (down to zero) before vesting if the NBFC identifies that the performance on which it was accrued was materially misstated or achieved through excessive risk-taking.
• Include clawback provisions: already-paid variable compensation can be recovered if material compliance violations, fraud, or adverse risk outcomes are subsequently identified.

The March 2026 enforcement action specifically penalised an NBFC that paid the entire variable compensation package of its senior management as a single upfront payment, explicitly the structure the Directions prohibit. The action signals that RBI examiners are checking compensation governance from the first examination cycle after the Directions took effect.

Committee Structure and Governance Processes

The Governance Directions formalise committee requirements that were previously discretionary for many NBFCs:

• Risk Management Committee: mandatory for Middle and Upper Layer NBFCs. Majority of Board members; at least one independent director must be the chair. Meets at least quarterly.
• Audit Committee: mandatory for all layers above specified thresholds. Minimum three members, majority independent. CCO and statutory auditor attend as invitees.
• Nomination and Remuneration Committee (NRC): mandatory for Middle and Upper Layer NBFCs. Responsible for Board appointment quality, KMP remuneration design (including malus-clawback structures), and succession planning.
• Customer Service Committee: required for deposit-taking NBFCs and all NBFCs above specified asset thresholds. Reviews customer grievances, fair practices compliance, and product suitability assessment.

Key Takeaways

• RBI NBFC Governance Directions 2025 create India’s first standalone NBFC governance framework, effective from 28 November 2025. Enforcement has already begun; March 2026 penalty action confirms the RBI is actively examining compliance.
• Board composition: minimum one-third IDs for Middle Layer; majority IDs for Upper Layer; mandatory expertise in credit risk, IT/cybersecurity, and gender diversity requirements.
• CCO appointment is mandatory for Middle Layer NBFCs above Rs 1,000 crore and all Upper Layer NBFCs with direct Board reporting and independence from business lines.
• Variable compensation must include deferral, malus, and clawback provisions. Upfront payment of the entire variable compensation is a documented enforcement trigger.
• Four mandatory Board committees for Middle and Upper Layer NBFCs: Risk Management, Audit, Nomination and Remuneration, and Customer Service.

Frequently Asked Questions

Conclusion

RBI NBFC Governance Directions 2025 are not a theoretical framework; they are an operational reality with enforcement teeth. The March 2026 penalty action occurred just four months after the Directions were issued, confirming that the RBI is treating governance compliance with the same seriousness as prudential compliance.

Conduct a gap analysis against the Directions immediately. Prioritise Board reconstitution where necessary, CCO appointment where required, and compensation structure redesign to incorporate deferral, malus, and clawback. These are not complex changes in concept, but they require Board-level decisions and institutional implementation timelines that favour early action.