The Central Board of the Reserve Bank of India (RBI) has decided to create a specialised supervisory and regulatory cadre within the RBI in order to strengthen the supervision and regulation of commercial banks, urban cooperative banks and non-banking financial companies.
The decision, which was taken at the meeting of the Central Board of the RBi in Chennai on Tuesday, follows a series of events including the IL&FS defaults, ICICI Bank loan issue, Punjab National Bank fraud and the liquidity issues in the NBFC sector in the last two years. The board meeting also reviewed the present structure of supervision in RBI in the context of the growing diversity, complexities and interconnectedness within the Indian financial sector.
According to banking sources, mutual funds investments in NBFC debt instruments and promoters pledging of shares and funding of promoters have raised concerns in the wake of the liquidity shortage being faced by some NBFCs and housing finance companies. There were complaints that the RBI was lax in the supervisory functions, especially in timely detection of frauds and poor governance in the banking sector. While the Standing Committee on Finance had last year questioned the RBI for failing to take preemptive action in checking bad loans in the banking system prior to the Asset Quality Review undertaken in December 2015, official sources said the RBI acted quickly and decisively when the bad loan issue cropped up and put 12 banks under the Prompt Corrective Action (PCA).
When Urjit Patel was the governor of the RBI, the central bank had said in a written letter to the parliamentary panel that its supervisory process does not constitute an audit of banks. With the number of commercial bank branches being more than 1,16,000 in the country it would be impossible to cover each and every branch under the RBI’s supervisory process, the central bank had said. The RBI currently has a Board for Financial Supervision (BFS), with four Directors from the Central Board as members and chaired by the Governor. While the Deputy Governors of the Reserve Bank are ex-officio members, one Deputy Governor, traditionally the Deputy Governor in charge of supervision, is nominated as the Vice-Chairman of the Board.
To help manage rise in complexity of regulated entities
The RBI’s decision to create a specialised supervisory and regulatory cadre is pertinent in light of increasing complexity of the regulated entities such as banks and non-banking financial companies (NBFCs). Cases of recent large frauds at banks and defaults by NBFCs, which roiled the financial markets over the past year, require specialized supervision to ensure that the financial sector remains in good health.
In April 2018, a sub-committee of the BFS was constituted, which performs the functions and exercises the powers of supervision and inspection under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. The sub-committee is chaired by the Deputy Governor in charge of supervision and includes the three Deputy Governors and two Directors of the Central Board as members. The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Department of Co-operative Bank Supervision (DCBS) and gives directions on regulatory and supervisory issues.
Meanwhile, the Central Board reviewed the current economic situation, global and domestic challenges and various areas of operations of the Reserve Bank. Among other important matters, the board discussed the medium term strategy document, covering the mission statement and the vision statement.
Other matters discussed by the Board included, inter-alia, issues related to the currency management and banker to the government functions of the RBI.
The RBI had last week asked non-banking finance companies (NBFCs) with asset size of more than Rs 5,000 crore to appoint a Chief Risk Officer (CRO) with clearly specified role and responsibilities amid growing worries over an “imminent crisis” in the NBFC sector due to credit squeeze, overleveraging, excessive concentration, massive mismatch between assets and liabilities and misadventures by some large entities like the IL&FS group.