From UPSC perspective, the following things are important :
Prelims level : CRO and its terms of reference
Mains level : Curbing NPAs
- The RBI has asked the non-banking financial companies (NBFCs) with assets of more than ₹5,000 crore to appoint a chief risk officer (CRO).
Why such move?
- With the increasing role of NBFCs in direct credit intermediation, there is a need for NBFCs to augment risk management practices.
- 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.
Terms of Reference for Chief Risk Officer (CRO)
- The primary role of the risk officer will be identification, measurement and mitigation of risks.
- All credit products (retail or wholesale) shall be vetted by the CRO from the angle of inherent and control risks.
- The CRO’s role in deciding credit proposals shall be limited to being an adviser.
Reporting by CRO
- RBI has mandated that the CRO shall report directly to the MD and CEO or the risk management committee (RMC) of the board.
- Moreover, in case the CRO reports to the MD and CEO, the risk management committee or the board shall meet the CRO in the absence of the MD and CEO, at least on a quarterly basis.
- The CRO shall not have any reporting relationship with the business verticals of the NBFC and shall not be given any business targets.
Appointment and Transfer
- The CRO shall be a senior official in the hierarchy of an NBFC and shall possess adequate professional qualification or experience in the area of risk management.
- The CRO shall be appointed for a fixed tenure with the approval of the board.
- There shall not be any ‘dual hatting’ i.e. the CRO shall not be given any other responsibility.
- The CRO can be transferred or removed from his post before completion of the tenure only with the approval of the board.
- And such premature transfer or removal shall be reported to the department of non-banking supervision of the regional office of RBI under whose jurisdiction the NBFC is registered.