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India’s central bank is ramping up its supervision of the country’s commercial lenders and shadow banks

Business Insider India logoBusiness Insider India 22-05-2019 Dilsher Dhillon

© Reuters

In response to the spate of frauds at large banks like Punjab National Bank and Yes Bank, and defaults by non-banking financial companies (NBFC) in the last year, the Reserve Bank of India is bolstering its supervision of the country’s lenders.

The central bank announced that it would create a specialised supervisory division within its ranks to focus on the regulation of commercial banks, cooperative banks and NBFCs or shadow banks.

All of the RBI’s different supervisory and regulatory processes and resources will be consolidated under this division in the aim of making it more responsive to early warning signs.

The decision was taken at a meeting of the board of the RBI in Chennai wherein the central bank’s current structure of supervision and regulatory capabilities were reviewed in light of the growing complexity of the financial sector.

The RBI’s job is getting harder as banks grow bigger. There are over 100,000 branches of commercial banks around India and thousands of NBFCs.

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Following the liquidity crunch in the NBFC sector, concerns have been raised by investors that the RBI was slow to detect and monitor governance lapses in banks and the shortage of financing among the country’s NBFCs.

Similar complaints were levelled against the central bank prior to the Asset Quality Review it undertook in late 2015 to uncover the depth of the bad loan problem.

The creation of the specialised supervisory cadre is aimed at preventing further lapses and their subsequent impact on financial markets.

Last week, in an additional attempt to alleviate the NBFC liquidity crisis, RBI ordered large shadow banks to appoint a Chief Risk Officer.

The order pertains to NBFCs with assets in excess of ₹50 billion. It is likely a precursor to requiring shadow banks to follow a risk-based supervision approach like the country’s commercial lenders, wherein present and future risks are mitigated through regular corrective actions.

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