• The board of directors of the Reserve Bank of India (RBI) has decided to create a specialised supervisory and regulatory cadre within the RBI to strengthen the supervision and regulation of commercial banks, urban cooperative banks and non-banking financial companies (NBFCs).

Analysis:

• This move to revamp the current structure will involve consolidating the different supervisory and regulatory activities and resources under a separate division, and also hiring external experts for the function. Last year, RBI had advertised for hiring supervisory resources at the assistant general manager level which includes bankers and accountants.
• The central bank is also looking to introduce risk-based supervision for NBFCs and urban cooperative banks, said a second official aware of the matter.
• Currently, banks follow risk-based supervision which focusses on evaluating both present and future risks and facilitates early corrective action. In comparison, supervision of NBFCs and urban cooperative banks is less stringent.
• These departments will be more focussed and will ensure that there are early warning signals which will alert the regulator about an impending crisis.
•  With the increasing role of NBFCs in direct credit intermediation, there is a need for NBFCs to augment risk management practices.
• The decision to consolidate the supervisory and regulatory structures within RBI is not new. Before 1991, RBI had a stand-alone department of supervision for all the entities supervised by it. It got separated into different departments following the Harshad Mehta scam.
• RBI’s move comes in the wake of ongoing rating downgrades of non-banks which has raised fears of another liquidity crisis. Following a series of defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS) last year, mutual funds with exposure to debt papers of the company had to write off a chunk of their holdings. This, and the ensuing defaults by some non-banking financial companies (NBFCs), had led to the liquidity crisis.