RBI To Step Up Supervision Capabilities Through New Division

The central board of the Reserve Bank of India, on Tuesday, decided to strengthen its supervisory capabilities by creating a new cadre of officials who will be trained for supervision of banks and non-bank lenders.

The decision comes at a time when the banking regulator has been caught off-guard by troubles erupting in systemically-important institutions like the Infrastructure Leasing and Financial Services Group. The regulator has also been faulted for being unable to catch a build-up of bad loans across banks and liquidity risks across non-bank lenders.

In a statement, the RBI said that its board reviewed the present structure of supervision in the context of the growing diversity, complexities and interconnectedness within the Indian financial sector.

Currently, the RBI has departments that oversee the regulation and supervision of banks and non-banking finance companies. It also formed an enforcement department in April 2017 to oversee regulatory compliance and violations by banks, NBFCs and other regulated entities.

Risk-Based Supervision

At present, the RBI follows a risk-based supervision approach and assesses financial institutions across a whole host of parameters. These paramters include functioning of the board and board committees, credit appraisal and IT systems, among others. As part of the inspection process, the regulator points out any shortcomings it finds and communicates corrective measures needed to the bank.

Despite these systems being in place, the Indian financial systems has seen a number of accidents in recent years.

In February 2018, Punjab National Bank was hit by a Rs 14,000 crore fraud, which went unnoticed for years. Loopholes in systems that allowed for the fraud were also not caught. In September 2018, AAA-rated IL&FS started defaulting on its dues leading to a credit freeze.

In a conversation with BloombergQuint in October, former RBI deputy governor Rakesh Mohan had said that the growing complexity and size of the Indian financial sector requires the RBI to take a relook at the size of its professional staff as well as their technical competence. Former chief economic adviser Arvind Subramanian had flagged off similar concerns at a book launch in November. The RBI must step its supervisory functions or be willing to pass it on to a new agency, Subramanian had said.

“This was surely a much needed step considering recent events that have occurred. A specialised supervisory and regulatory cadre could be created with some RBI insiders as well as external experts,” Anand Sinha, former RBI deputy governor told BloombergQuint.

Another former deputy governor, who spoke on condition of anonymity, shared that view. Since most officials in the RBI move departments every 5-7 years, there is a loss of capacity and the organisation needs to keep training new people. This way there will be continuity and specialisation, this person said while adding that this was a step that was ‘badly needed.’

Other Matters

During its meeting, the RBI’s central board also discussed issues around currency management and the role of the banking regulator as the banker to the government.

The statement did not elaborate on the nature of these discussions.

The meeting was chaired by RBI Governor Shaktikanta Das. RBI Deputy Governors NS Vishwanathan, Viral Acharya, MK Jain and BP Kanungo, were also present. The government was represented by Subhash Chandra Garg, secretary, Department of Economic Affairs and Rajiv Kumar, secretary, Department of Financial Services.