Banking Sector Reforms

Reserve Bank set to create a specialised supervisory cadre


From UPSC perspective, the following things are important :

Prelims level : Board for Financial Supervision (BFS) under RBI

Mains level : NPA Crisis

  • The RBI has decided to create a specialised supervisory and regulatory cadre within the RBI in order to strengthen the supervision and regulation of commercial banks, urban cooperative banks and NBFCs.

Need for a regulatory Cadre

  • This move is followed a series of events including the IL&FS defaults, ICICI Bank loan issue, PNB fraud and the liquidity issues in the NBFC sector in the last two years.
  • The present structure of supervision in RBI in the context of the growing diversity, complexities and interconnectedness within the Indian financial sector is too complex.
  • There were complaints that the RBI was lax in the supervisory functions, especially in timely detection of frauds and poor governance in the banking sector.

All banks audit is not possible

  • When Urjit Patel was the governor of the RBI, the central bank had said that its supervisory process does not constitute an audit of banks.
  • With the number of commercial bank branches being more than 1,16,000 in the country it would be impossible to cover each and every branch under the RBI’s supervisory process.

If not RBI, then who performs supervisionary functions? 

Board for Financial Supervision (BFS)

  • The Reserve Bank of India performs the supervisory function under the guidance of the Board for Financial Supervision (BFS).
  • The Board was constituted in November 1994 as a committee of the Central Board of Directors of the RBI under the RBI (Board for Financial Supervision) Regulations, 1994.
  • Sub-committees of BFS are also constituted under the chair of Dy. Governor.
  • The primary objective of BFS is to undertake consolidated supervision of the financial sector comprising Scheduled Commercial and Co-operative Banks, All India Financial Institutions, Local Area Banks, Small Finance Banks, Payments Banks, Credit Information Companies, NBFCs and Primary Dealers.

Composition of BFS

  • The BFS has four Directors from the Central Board as members and is chaired by the Governor.
  • While the Deputy Governors of the Reserve Bank are ex-officio members, one Deputy Governor, traditionally the Deputy Governor in charge of supervision is nominated as the Vice-Chairman of the Board.

Other moves by RBI

  • The RBI had last week asked non-banking finance companies (NBFCs) with asset size of more than Rs 5,000 crore to appoint a Chief Risk Officer (CRO).
  • It clearly specified role and responsibilities amid growing worries over an “imminent crisis” in the NBFC sector due to credit squeeze, overleveraging, excessive concentration, massive mismatch between assets and liabilities and misadventures by some large entities like the IL&FS group.
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