Shadow banking players must give utmost importance to protection of customers as it is "non-negotiable" Reserve Bank of India (RBI) Deputy Governor  M Rajeshwar Rao on Friday urged the NBFC sector.

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The Deputy Governor was emphasising on the need to create a culture of responsible governance in the NBFC sector, PTI reported.

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Recalling incidents of the coercive recovery practice by some of the players, the Deputy Governor said, such developments spurred by purely commercial considerations have dented the credibility of the whole system which flourishes and thrives on trust.

"My ask here is that we should not compromise on the ethos of the finance for mercurial or ephemeral gains. These gains would anyway accrue to the institutions over the long term if and when it is built on an edifice of trust and mutual benefit," he said at the NBFC Summit organised by Confederation of Indian Industries (CII).

Observing that RBI is inundated with the complaints of harsh recovery practices, breach of data privacy, increasing fraudulent transactions, cybercrime, excessive interest rates and harassment, he said, protection of the customers is "non-negotiable".

"To us at RBI, any regulatory move has always, the larger public interest as its core theme and we have been doing our best having regard to public interest in general for the financial system. Putting in place an elaborate grievance redressal machinery, an RBI Ombudsman scheme, Fair Practices Code, etc. Are pointers in this direction," he said.

More recently, he said, the Scheme for Internal Ombudsman (IO) has been extended to NBFCs on a selective basis. The IO at the apex of the NBFCs' internal grievance redressal mechanism, shall independently review the resolution provided by the NBFC in the case of wholly or partially rejected complaints.

However, regulatory measures alone may not suffice, he said, adding, protecting customers against unfair, deceptive, or fraudulent practices has to become top priority of every entity and permeate the organisation culturally and become a part of its ethos.

"Customer service would mean, amongst many other things, that a customer has similar pre-sale and post-sale experience, she/he is not disadvantaged vis-?-vis another customer because he or she approached the financial entity through a different delivery channel, and he or she has a right to hassle-free exit from the contractual obligation. This issue has been deliberated often enough and it's time to act now," he said.

Highlighting that the non-banking financial sector is at an inflection point, he said, "from here the entities which put interest of the customer above everything else, are responsible while innovating and have strong governance culture, will thrive while others will fade with the passage of time."

The Reserve Bank has been carrying out calibrated modifications and adjustments to mould the NBFC regulations in the changing business environment, he said.

With regard to governance, he urged NBFCs to create a culture of responsible governance in their respective organisations where every employee feels responsible towards the customer, organisation, and society.

Good governance is key to long term resilience, efficiency and survival of the entities, he added.Observing that the non-banking financial space has been a hotbed of financial innovation, Rao said, "point of caution here is that the innovation should not be at the cost of prudence and should not be designed to cut corners around regulatory, prudential and disclosure requirements."

Responsible financial innovation should always have customers at its centre and should be aimed at creating positive impact on the financial ecosystem and the society, he added.

There are 9,651 NBFCs across twelve different categories focussed on a diverse set of products, customer segments, and geographies.

As on March 31, 2021, NBFC sector (including Housing Finance Companies) has assets worth more than Rs 54 lakh crore, equivalent to about 25 per cent of the asset size of the banking sector. Over the last five years the NBFC sector assets have grown at a cumulative average growth rate of 17.91 per cent.