In a major overhaul, the RBI may restructure its supervisory wing by merging the three departments that oversee commercial banks, non-banking financial companies (NBFCs), and urban cooperative banks.
In a bid to improve efficiency, Reserve Bank of India released a statement Tuesday saying, “The Board has decided to create a specialised supervisory and regulatory cadre within the RBI. “
According to a report by Money Control, the central board of RBI met Monday, May 20, in Chennai, to further introduce changes to codes and criteria for hiring. RBI plans to undertake lateral recruitment of consultants as part of a functional revamp, the report said.
Primarily, the overhaul is aimed to improve efficiency in banking supervision, one of the chief duties of the country’s apex lender. To strengthen supervision and regulation is of paramount importance in light of the recent foreshadowing of a backbone-breaking crisis in the shadow banking sector.
A move to combat critical threats
The board on Monday also reportedly reviewed the existing structure against the growing diversity, complexities, and overlapping in the Indian financial sector.
By combining supervisory resources of all three departments, RBI hopes to utilise them better in effectively monitoring the failure of credit rating agencies and the recent defaults in the NBFC sector.
This will also enable regulatory authorities to identify the threat in advance, and anticipate early signs of stress in the banking system going forward.
What’s ailing the NBFC sector?
The countrys shadow banking system has been grappling with multiple crises in the wake of the massive turmoil at the IL&FS group, accompanied by other debt defaults by major entities.
“All this has left the NBFC sector facing issues of credit squeeze, over-leveraging, excessive concentration, a massive mismatch between assets and liabilities among others”, said corporate security advisor Injeti Srinivas, earlier this month this month.
These factors coupled with financial misadventures by some very large entities is a perfect recipe for disaster, he said, adding that that corporate governance is being put to test.
RBI’s role in ameliorating the crisis
NBFCs that borrow from banks and mutual funds are struggling to clean their books and shore up their balance accounts, owing partly to the rise in costs of operations, especially for small-scale NBFCs. Not only do they have no money to lend, but banks now want NBFCs to promise higher returns on the loans they buy from them.
It is the latter, coupled with consequently higher interest rates that stands to affect the construction sector, auto, and jewellery firms, and consumption of fast-moving consumer goods (FMCG).
Meanwhile, it is clear from the National Stock Exchange controversy that SEBI along with RBI has since adopted a zero tolerance policy in matters of non-compliance.
With RBI as banking regulator penalising Indian banks banks and NBFCs, most of them are now summarised as non-compliance of the regulatory PCA guidelines. Recently, RBI also penalised prepaid instrument issuers and international remittance providers.
At a time when Indian banks are already faced with a total NPA of Rs 10.03 lakhs Cr (nearly 11.6% of the total lending of the banking industry), the IL&FS filed for bankruptcy, to which the banks have a total exposure of Rs 57,000 Crs.
The group as a whole has total outstanding liabilities of Rs 91,000 Crs comprising of term loans, debentures, commercial papers, cash credits etc. The trouble for the markets and the economy as a whole increased when the company started defaulting on its obligations due to extreme cash crunch. The defaults ranged from term loans, inter-corporate deposits, commercial papers, letter of credit etc which rattled the markets completely, wrote Akash Baruah for Qrius.
IL&FS defaulting would mean that the NPA situation further worsens to a great extent, all the mutual funds who were holding CPs issued by the company would be at loss, while the NBFCs who had lent money to the company would also require to face loses. This would have a cascading effect on the whole economy and the financial system will also have to bear the burnt of it. Investors factored this growing volatility into their valuations and resulted in massive sell offs across asset classes, Baruah further noted.
In April, the Serious Fraud Investigation Office (SFIO) arrested Hari Sankaran, former managing director and vice-chairman of IL&FS for abuse of power through fraudulent conduct.
The controversy justly drives home the significance of a financial monitoring and regulating system that not only deters such wrongdoing but also holds miscreants to account when deterrence fails.
What else did RBI board discuss Monday?
Besides the renewed vertical, the central bank has also started the process of hiring laterally. According to Money Control, the board invited applications for 61 vacancies in Grade C on a contractual basis last year.
The applicants would fill vacancies in departments concernjng trade finance, corporate lending and treasury, to retail lending, analytics, stress testing, accounting, and IT among others.
According to the RBI statement, the board also discussed issues related to the currency management and its functions as a banker to the government.
Prarthana Mitra is a Staff Writer at Qrius