RBI to beef up supervision of NBFCs to maintain financial stability: Das

Financial sector governance reforms top RBI agenda

The Reserve Bank of India (RBI) was keeping a close vigil on non-banking financial companies (NBFC) and would not hesitate to step in with more measures if needed, Governor Shaktikanta Das said on Saturday.  

Speaking at the 15th convocation of the National Institute of Bank Management (NIBM), Pune, Das said the conventional approach to the regulation and supervision of NBFCs had been ‘light-touch’ so that they could complement banks, but in the light of recent developments, there was a case for having a fresh look at their regulation and supervision. “It is our endeavour to have an optimal level of regulation and supervision so that the NBFC sector is financially resilient and robust,” he added.

The RBI, he said, would continue to monitor the activity and performance of NBFCs with a focus on major entities and their inter-linkages with other sectors, and would not hesitate to take any step to maintain financial stability.

Major NBFCs are facing an acute liquidity crunch after the IL&FS group defaulted last year. They are selling their non-core assets, and securitising retail assets to banks in order to raise funds as markets are not giving them money anymore and loans from banks are becoming sparse.

While there is an expectation of a credit line or funding mechanism from the RBI, the central bank so far has not been clear about it.

Meanwhile, DHFL, India’s third-largest housing finance company, has been downgraded to default category, alongside Reliance Capital and the IL&FS group. All three were considered AAA once.

Commenting on the stressed assets framework guidelines released on Friday, the governor said the rules “provide a system of strong disincentives in the form of additional provisioning for delay in initiation of resolution or insolvency proceedings”.

The new framework makes inter-creditor agreements mandatory and provides for a majority decision to prevail. Das said the RBI would issue directions to banks for initiation of insolvency proceedings against borrowers for “specific defaults so that the momentum towards effective resolution remains uncompromised.”

“It is expected that the revised prudential framework for resolution of stressed assets will sustain the improvements in credit culture that have been ushered in by the efforts of the government and the Reserve Bank so far, and that, it will go a long way in promoting a strong and resilient financial system in India,” Das said.

Way forward

The RBI governor said in the coming months, he aims to address some important issues – the foremost being “governance reforms in banks and non-banks.”
 

He said governance issues in private sector banks “originate from altogether different set of concerns”. “The issues here mainly relate to incentive structure of their managements, quality of audits and compliance and also efficient functioning of audit and risk management committees,” the governor said.

Last week, the RBI barred audit firm S R Batliboi, an affiliate of EY, from doing statutory audit of bank books for a year.

The central bank had earlier also issued a discussion paper on proposed guidelines for compensation in private sector banks.

To improve the functioning of public sector bank boards and their corporate governance, further streamlining of the appointment process, succession planning and compensation need to be addressed. There is also a need to create a pool of independent directors across various areas of expertise.

“The performance of MDs/CEOs of both public and private sector banks should be closely monitored by the Board of Directors either through a sub-committee or through an external peer group review,” the governor said.

The performance evaluation of public sector banks will be put in place for banks to improve their financial and operating parameters. This will also redefine the contours of corporate governance in PSBs with a focus on transparency, accountability and efficiency, he said.