The Reserve Bank of India has 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.
“The CRO is required to function independently so as to ensure highest standards of risk management,” the RBI said in a notification on Thursday. “With the increasing role of NBFCs in direct credit intermediation, there is a need for NBFCs to augment risk management practices… boards of NBFCs should strive to follow best practices in risk management,” the RBI said.
“The CRO should be a senior official in the hierarchy of an NBFC and shall possess adequate professional qualification/ experience in the area of risk management. “The CRO should be appointed for a fixed tenure with the approval of the board. The CRO can be transferred/ removed from his post before completion of the tenure only with the approval of the board and such premature transfer/ removal should be reported to the Department of Non-Banking Supervision of the regional office of the bank under whose jurisdiction the NBFC is registered,” the RBI said.
“In case the NBFC is listed, any change in incumbency of the CRO should also be reported to the stock exchanges,” the RBI said.
“The board should put in place policies to safeguard the independence of the CRO. In this regard, the CRO should have direct reporting lines to the MD & CEO/ Risk Management Committee (RMC) of the board. In case the CRO reports to the MD & CEO,
the RMC/ board should meet the CRO without the presence of the MD & CEO, at least on a quarterly basis,” it said.
“The CRO should not have any reporting relationship with the business verticals of the NBFC and should not be given any business targets. Further, there should not be any ‘dual hatting’ i.e. the CRO should not be given any other responsibility,” the RBI said. “The CRO should be involved in the process of identification, measurement and mitigation of risks. All credit products (retail or wholesale) should be vetted by the CRO from the angle of inherent and control risks. The CRO’s role in deciding credit proposals should be limited to being an advisor,” the RBI said.
According to the RBI, in NBFCs that follow committee approach in credit sanction process for high value proposals, if the CRO is one of the decision makers in the credit sanction process, the CRO should have voting power and all members who are part of the credit sanction process, should individually and severally be liable for all the aspects, including risk perspective related to the credit proposal.
Liquidity crisis in the NBFC sector had raised concerns in the recent past. “There is an imminent crisis in the NBFC sector. There is a credit squeeze, over-leveraging, excessive concentration, massive mismatch between assets and liabilities, coupled with some misadventures by some very large entities, which is a perfect recipe for disaster,” Corporate Affairs Secretary Injeti Srinivas had said in an interview to a wire agency last week.
Meanwhile, the RBI is also considering new limits on the liquidity mismatches that NBFCs operate with as part of its plan to nudge them towards more stable sources of funding, banking sources said. NBFCs’ asset-liability mismatch norms are likely to be aligned with those of banks. NBFC credit growth was 29.2 per cent on a year-on-year basis. NBFC credit saw a month-on-month uptick growing by 11.4 per cent. The continued uptick signals banks’ willingness to lend to the NBFC sector, partially easing the tight liquidity situation.