RBI likely to get US Federal Reserve-like powers of supervision

The Reserve Bank of India (RBI) may get more powers before large corporate and industrial houses are permitted to promote banks. This is to help it deal with connected lending and exposures between the banks and other financial and non-financial group entities, or consolidated supervision.

This will be akin to the US Federal Reserve Act. And, the RBI is to examine the necessary legal provisions that may be required to deal with all concerns in this regard.

The stage may now be set for another tweak to the central bank’s specialised supervisory and regulatory cadre (SSRC). The decision to create the SSRC was taken at the RBI’s central board meet in Chennai in May 2019. “The restructuring of the regulation and supervision function is among a series of steps RBI will take to implement this decision,” RBI had said.

The workload on the supervisory part of RBI will increase on harmonisation of corporate structures. 

Many jurisdictions have in place comprehensive frameworks for regulation of transactions within large conglomerates. In the US, sections 23A and 23B of the Federal Reserve Act specify the statutory restrictions on transactions between a member bank and its affiliates. In the European Union, the Financial Conglomerates Directive provides a framework for supplementary layer of prudential supervision of financial conglomerates addressing the concerns behind such transactions.

The deadline for officers to decide on their career path in the biggest organisational rejig in the central bank’s 85-year history had been extended to July 31, following reservations expressed by officers. The earlier deadline was January 31.

It is surmised that the central bank may allow officers in its SSRC to move on to other departments, albeit after a longer lock-in. This tweak is to address the concerns of an overwhelming majority of officers that they would not like to spend the rest of their careers in the SSRC on having opted for it.

As on date, officers stay put in a department for five years, after which they move on. In the new arrangement for the SSRC, “this lock-in may be extended by a few years”, said a source and there is to be no permanent residency, which had been the bone of contention.

The lack of a rotation policy for the SSRC saw the majority of officers (almost 95 per cent) between grades ‘B’ and ‘C’, and in higher ranks, opt out of the two specialised units — the department of regulation (DoR) and department of supervision (DoS). Three central bank departments that looked after the regulation and supervision of banks, co-operative banks, and non-banking financial companies were folded into these two units, effective November 1, 2019.

The heartburn among officers after this announcement led to efforts by the deputy governors and one external director to sweeten the new arrangement through incentives. Yet, officers declined to opt for the unified cadre.