Implementation of Core Financial Services Solution (CFSS) for Non-Banking Financial Companies (NBFCs)

Introduction:

On October 22, 2021, the Reserve Bank of India (RBI) issued the Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs, which introduced new guidelines for NBFCs. The framework, effective from October 1, 2022, mandated the adoption of Core Banking Solutions (CBS) by NBFCs with 10 or more branches within a three-year glide path. In line with this, the RBI issued a circular on February 23, 2022, stating the implementation of Core Financial Services Solution (CFSS) by NBFCs.

Mandatory Implementation of CFSS:

According to the RBI circular, NBFCs categorized as Middle Layer (ML) and Upper Layer (UL) with 10 or more fixed point service delivery units as of October 1, 2022, are mandated to implement CFSS. CFSS is a digital platform similar to the Core Banking Solution adopted by banks, providing seamless customer interfaces and transaction capabilities with anytime, anywhere access. It also ensures centralized databases, accounting records, and generates suitable Management Information System (MIS) reports for both internal purposes and regulatory reporting.

Implementation Timeline:

The implementation of CFSS for NBFCs falls into two categories:

1. NBFCs - Middle Layer (ML) and Upper Layer (UL) with 10 or more fixed point service delivery units: These NBFCs are required to implement CFSS on or before September 30, 2025. However, NBFC-UL must ensure CFSS implementation sooner.
2. NBFCs - Bottom Layer (BL) and NBFCs - Middle Layer (ML) and Upper Layer (UL) with fewer than 10 fixed point service delivery units: Implementation of CFSS is not mandatory for these NBFCs, but they are encouraged to consider it for their own benefit.

Progress Reporting:

NBFCs must submit a quarterly progress report on the implementation of CFSS, including milestones approved by the Board or Committee of the Board, starting from the quarter ending March 31, 2023. These reports should be furnished to the Senior Supervisory Manager (SSM) Office of the Reserve Bank.

Target Audience:

The CFSS implementation applies to two categories of NBFCs:

a) NBFCs - Deposit Taking

b) NBFCs - Non-Deposit Taking

CFSS Major Metrics and Software Requirements:

The CFSS implementation requires various modules and features in the software used by NBFCs. Some of the major metrics and requirements include:

a) Customer Account with KYC Validations: The software should include automated KYC validations, and a Central KYC Reporting Plugin to generate the CKYC Unique ID.

b) Loan Account: The system should support automated retrieval of Credit Information Bureau (CIC) and Information Utility (IU) data.

c) Alert Set on Loan Account: The software should enable alerts to be set on loan accounts for timely monitoring and action.

d) Reminder and Recovery Message and Call Advisory: The system should provide features for reminders, recovery messages, and call advisories to aid in the recovery process.

e) Waiver and Write-off: The software should support the waiver and write-off processes as applicable.

f) Deposit Account (for Deposit Taking NBFCs): The software should incorporate features related to deposit accounts.

g) Accounting Entries: The CFSS should include functionality for capturing accounting entries.

h) Trial Balance: The system should generate trial balance reports.

i) Profit and Loss Account: The software should generate profit and loss account statements.

j) Balance Sheet: The CFSS should provide features to generate balance sheets.

Additional Requirements:

a) Maker Checker Concept: The software should include a maker-checker concept to ensure proper authorization and verification of transactions.

b) Inter-service point data sharing and reporting with real-time updates: The CFSS should facilitate seamless data sharing and reporting between different service points with real-time updates.

c) Head Office - centralized database: The system should have a centralized database at the head office for efficient data management.

d) Authentication and Authorization: The CFSS should provide robust authentication and authorization mechanisms for secure access to the system.

e) Cloud Storage Facilities: The software should support cloud storage facilities for data storage and backup.

Conclusion:

The RBI's directive on the implementation of Core Financial Services Solution (CFSS) for NBFCs aims to enhance customer experience, streamline operations, and ensure regulatory compliance. NBFCs must adhere to the prescribed implementation timelines, submit progress reports, and adopt the necessary CFSS modules and features to meet the requirements outlined by the Reserve Bank of India. By embracing CFSS, NBFCs can leverage digital capabilities and centralized databases to improve their offerings and financial management processes.