Corporate governance in Non-Banking Financial Companies (NBFCs) and insurance entities is a core legal and regulatory obligation rather than a voluntary best practice. These institutions play a critical role in credit intermediation, risk pooling, and safeguarding consumer interests, which makes them subject to close regulatory supervision. Strong governance frameworks ensure transparency in decision-making, accountability of management and boards, ethical conduct, and effective risk management across operations.

With increasing regulatory scrutiny and the rapid digitisation of financial services, governance has become a key determinant of institutional credibility and stability. Regulators now assess entities not only on financial performance but also on the robustness of their governance structures, internal controls, and compliance culture. High-quality corporate governance builds regulatory trust, protects consumers, mitigates systemic risk, and supports sustainable long-term growth in an increasingly complex financial environment.

In this article, CA Manish Mishra talks about Corporate Governance in NBFCs and Insurance Entities.

Legal and Regulatory Framework Governing Corporate Governance

Governance Framework for NBFCs

Corporate governance in NBFCs is governed by regulatory directions issued by the Reserve Bank of India, particularly under the scale-based regulatory framework. Governance requirements increase with the size, complexity, and risk profile of the NBFC. These regulations mandate structured board oversight, internal controls, risk management systems, and enhanced disclosures to ensure financial stability and customer protection.

Governance Framework for Insurance Entities

Insurance entities are governed by a comprehensive governance framework issued by the insurance regulator, which focuses on board accountability, conflict-of-interest management, policyholder protection, and ethical conduct. Governance norms for insurers are closely aligned with company law provisions, particularly with respect to board composition, related party transactions, and disclosure requirements.

Governance Architecture and Operating Model

Three Lines of Defence Framework

Effective corporate governance in NBFCs and insurance entities is typically built on the three-lines-of-defence model. The first line consists of business and operational teams responsible for owning and managing risks. The second line comprises risk management and compliance functions that oversee and challenge business decisions. The third line is the internal audit function, which provides independent assurance to the board. This structure ensures checks and balances across the organisation and enables early detection of governance lapses.

Board of Directors: Roles and Responsibilities

Board Composition and Independence

The board is the highest governance authority and is expected to comprise individuals with diverse expertise in finance, risk, law, insurance, and technology. Independent directors play a crucial role in safeguarding stakeholder interests and ensuring objective oversight. Boards are increasingly expected to focus not only on growth strategies but also on risk appetite, customer outcomes, compliance culture, and long-term sustainability.

Fit and Proper Criteria and Accountability

Directors and key managerial personnel must satisfy fit-and-proper criteria, including integrity, competence, financial soundness, and absence of conflicts of interest. Governance effectiveness depends on documented appointment processes, performance evaluations, and accountability mechanisms. Poor leadership selection or weak oversight often results in systemic governance failures.

Board Committees and Their Governance Role

Audit Committee

The audit committee is responsible for overseeing financial reporting integrity, internal controls, statutory and internal audits, and whistleblower mechanisms. In regulated entities, it also monitors regulatory observations and ensures timely corrective actions. The effectiveness of the audit committee significantly impacts regulatory confidence.

Risk Management Committee

The risk management committee oversees credit risk, underwriting standards, liquidity, asset-liability management, operational risk, technology risk, and outsourcing risk. It ensures that business strategies remain aligned with the approved risk appetite and that emerging risks are identified and mitigated proactively.

Nomination and Remuneration Committee

This committee ensures that leadership appointments and remuneration structures promote prudent risk-taking. Variable pay and incentives must be aligned with long-term performance, asset quality, claims experience, customer satisfaction, and compliance outcomes, rather than short-term growth metrics.

Key Corporate Governance Themes for NBFCs

Governance Under Scale-Based Regulation

As NBFCs grow in size and complexity, regulatory expectations on governance intensify. Larger NBFCs are expected to maintain more sophisticated risk frameworks, detailed board reporting, stricter exposure norms, and stronger internal controls. Governance maturity becomes a prerequisite for sustainable expansion.

Underwriting and Collections Conduct

For lending institutions, governance is tested through underwriting discipline and collections practices. Boards must ensure that credit policies, pricing models, exception handling, and recovery processes are fair, transparent, and compliant with consumer protection standards. Weak governance in these areas often leads to asset quality stress and regulatory intervention.

Key Corporate Governance Themes for Insurance Entities

Product Governance and Policyholder Protection

In insurance entities, governance is closely tied to policyholder interests. Boards must ensure that products are designed with clear disclosures, fair pricing, and operational feasibility. Claims management is a critical governance area, and delays or unfair repudiations can result in regulatory action and reputational damage.

Related Party Transactions and Conflict Management

Insurance entities often operate within large corporate groups, increasing the risk of conflicts of interest. Strong governance requires structured identification, approval, disclosure, and monitoring of related party transactions to ensure arm’s-length dealings and protect policyholder interests.

Grievance Redressal and Dispute Resolution

Effective grievance redressal mechanisms are central to insurance governance. Boards are expected to monitor complaint trends, resolution timelines, and systemic issues. Strengthening internal dispute resolution processes enhances consumer trust and reduces regulatory risk.

Compliance Function and Documentation Discipline

Modern corporate governance requires continuous compliance supported by robust documentation. Institutions must maintain updated policies, board and committee minutes, risk dashboards, audit reports, vendor oversight records, and customer communication logs. Regulators increasingly assess governance based on the quality and consistency of documented evidence rather than verbal assurances.

Technology Governance, Data Privacy, and Cybersecurity

Technology and Outsourcing Governance

With increasing reliance on digital platforms and third-party service providers, governance must extend to technology and outsourcing arrangements. Boards are expected to oversee vendor selection, performance monitoring, data access controls, and exit strategies to mitigate operational and compliance risks.

Data Protection and Cyber Resilience

Data privacy and cybersecurity are now core governance responsibilities. Institutions must implement strong data governance frameworks, incident response plans, and regular security audits. Weak cyber controls can undermine regulatory standing and customer trust.

Recent Developments and Governance Expectations Going Forward

Recent regulatory developments emphasize stronger board accountability, enhanced consumer protection, and tighter control over conflicts of interest. Governance obligations are increasingly accompanied by defined implementation timelines and measurable outcomes. Enforcement actions in both NBFC and insurance sectors demonstrate that governance lapses can result in penalties, restrictions, or reputational damage.

Best Practices for Effective Corporate Governance

Compliance-Led Growth

Institutions that embed legal and compliance review into product design and strategic decision-making experience fewer regulatory challenges. Compliance-led growth reduces remediation costs and supports smoother expansion.

Strong Internal Controls and Audit Closure

Effective governance requires not just identifying issues but ensuring timely and complete remediation. Regular internal audits, issue tracking, and accountability mechanisms strengthen control effectiveness.

Continuous Professional Advisory

Given frequent regulatory changes, ongoing engagement with legal, regulatory, audit, and actuarial professionals helps institutions interpret requirements correctly and adapt governance frameworks proactively.

Conclusion

Corporate governance in NBFCs and insurance entities serves as the cornerstone of regulatory confidence, consumer protection, and financial stability. In a highly regulated financial environment, strong governance frameworks ensure that boards and management act responsibly, risks are identified and managed proactively, and institutional decisions are taken with transparency and accountability. Effective governance also reinforces ethical conduct, strengthens internal controls, and promotes a compliance-driven culture across the organisation.

As regulatory oversight becomes more rigorous and financial services continue to evolve through digitalisation and innovation, governance quality will play a decisive role in determining institutional success. Entities that invest in competent and independent boards, disciplined risk and compliance systems, transparent operations, and continuous monitoring mechanisms will be better equipped to respond to regulatory expectations. Such institutions not only reduce the risk of enforcement actions and reputational damage but also build long-term resilience, enabling sustainable growth in a complex and dynamic regulatory.

Frequently Asked Questions (FAQs)

Q1. What is corporate governance in NBFCs and insurance companies?

Ans. Corporate governance in NBFCs and insurance companies refers to the structured system of policies, internal controls, board oversight, and ethical standards that guide how these regulated entities are managed. It ensures transparent decision-making, accountability of directors and management, protection of customer interests, and compliance with regulatory requirements while maintaining financial stability and operational integrity.

Q2. Why is corporate governance important for NBFCs and insurers?

Ans. Corporate governance is critical because governance failures can directly result in financial instability, consumer harm, regulatory penalties, and loss of public confidence. Strong governance frameworks enable effective risk identification, compliance with laws, ethical business conduct, and responsible growth, thereby safeguarding stakeholders and ensuring long-term sustainability of regulated financial institutions.

Q3. How does governance differ between NBFCs and insurance entities?

Ans. Governance in NBFCs primarily focuses on credit risk management, liquidity controls, underwriting discipline, and fair collections practices. In contrast, insurance governance emphasizes product suitability, claims settlement fairness, policyholder protection, and grievance redressal. While both require strong board oversight, the nature of risks and regulatory priorities differ significantly.

Q4. What role does the board play in corporate governance?

Ans. The board plays a central role in corporate governance by setting strategic direction, approving risk appetite, overseeing management performance, and ensuring compliance with regulatory obligations. It is responsible for protecting stakeholder and consumer interests, monitoring risk and compliance frameworks, and ensuring that ethical standards and governance policies are effectively implemented.

Q5. Why are board committees important?

Ans. Board committees are important because they provide focused and specialised oversight of key governance areas such as audit, risk management, remuneration, and nominations. Committees enable deeper review, accountability, and timely decision-making, allowing the board to manage complex regulatory and operational risks more effectively and transparently.

Q6. How do related party transactions affect governance?

Ans. Related party transactions can create conflicts of interest and may compromise fairness and transparency if not properly governed. Strong corporate governance requires clear identification, arm’s-length pricing, board or committee approvals, and ongoing monitoring of such transactions to protect stakeholder interests and maintain regulatory confidence.

Q7. What is the role of internal audit in governance?

Ans. Internal audit plays a critical role by providing independent assurance to the board on the effectiveness of internal controls, risk management systems, and compliance processes. It helps identify weaknesses, verify implementation of corrective actions, and strengthen governance by ensuring that policies and procedures operate as intended.

Q8. How does technology impact corporate governance?

Ans. Technology impacts corporate governance by introducing risks related to data privacy, cybersecurity, system resilience, and third-party outsourcing. Boards must oversee technology governance frameworks, ensure secure data handling, monitor vendor dependencies, and establish incident response mechanisms to prevent operational failures and regulatory breaches.

Q9. What governance failures commonly attract regulatory action?

Ans. Regulatory action is commonly triggered by weak customer protection, poor claims or collections practices, ineffective internal controls, documentation gaps, unmanaged conflicts of interest, and inadequate board oversight. Such failures indicate governance breakdowns that can harm consumers and threaten financial stability.

Q10. What is the key governance focus for the future?

Ans. The key governance focus for the future is building regulator-ready institutions with strong documentation, consumer-centric processes, robust risk management, and continuous compliance embedded into daily operations. Governance will increasingly be judged on outcomes, transparency, and the ability to prevent risks rather than react to them.