RBI Moves To Strengthen Supervision Department
An Indian national flag flies at the Reserve Bank of India (RBI) building in Mumbai, India. (Photographer: Kanishka Sonthalia/Bloomberg)

RBI Moves To Strengthen Supervision Department

The Reserve Bank of India has reorganised its supervision department amid concerns that the regulator failed to catch the build-up of risk across banks and non-bank lenders. Recent instances of fraud, such as the one at Punjab and Maharashtra Cooperative Bank, have also damaged the regulator’s credibility.

To strengthen its supervision function, the RBI today said it’s reorganising divisions and changing its approach in some cases.

As a start, the central bank will consolidate supervision under a single department. At present, supervision of is undertaken through three separate departments—Department of Banking Supervision, Department of Non-Banking Supervision and Department of Co-operative Bank Supervision. A separate department looks at regulation for each of these segments as well.

“To deal more effectively with potential systemic risk that could arise due to possible supervisory arbitrage and information asymmetry, it has been decided to integrate the supervision function into a unified Department of Supervision and regulatory functions into a unified Department of Regulation with effect from Nov.1, 2019,” the RBI said in a statement.

The decision to do this was taken at a meeting of the RBI’s central board in May.

Along with the creation of a new department, the RBI will also change its approach to supervision, it said.

  • Supervisory and regulatory process will be more activity based.
  • Graded supervisory approach linked to size and complexity of entities will be initiated.
  • Consolidated supervision of financial conglomerates will be undertaken among the RBI supervised entities.
  • A specialised cadre in the area of regulation and supervision of financial sector entities will be set up.

A Series Of Misses

The RBI has had a series of misses over the last few years, ranging from delayed recognition of bad loans to a build-up of asset liability mismatches across non-bank lenders.

In 2015, the RBI undertook an asset quality review of lenders which led to a surge in reported bad loans, which had not been classified appropriately by banks. Since then, the RBI has tightened scrutiny of bad loan reporting and has asked banks to disclose any divergence in bad loan reporting.

Last year, in August, Infrastructure Leasing and Financial Services, regulated by the RBI as a core investment company, defaulted due to a build-up of leverage across the consolidated entity. The default by IL&FS led to an unraveling of asset-liability mismatches across a number of other non-bank lenders.

Separately, the RBI has also been criticised in the wake of large frauds.

In 2018, a nearly Rs 14,000 crore fraud was detected at Punjab National Bank, which had escaped the scrutiny of the bank’s management, concurrent auditors and regulatory checks and balances.

More recently, PMC Bank, a multi-state cooperative bank, was found to have lent a large part of its loan book to one industrial group, in breach of the RBI’s exposure rules.

When questioned about the lapses in supervision in October, RBI Governor Shaktikanta Das said the new supervision department would ensure these functions are carried out in a more focused manner.

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