RBI Tightening Supervision Of Banks And NBFCs — BQ Exclusive

The Reserve Bank of India has started increasing supervisory scrutiny of banks and non-bank finance companies, as it seeks to avoid instances of institutional failure, two people aware of the developments said.

In its bid to better regulate entities, the central bank is now focusing on efficacy of the systems put in place, rather than just compliance, the people said on the condition of anonymity. The RBI is reviewing whether tools such as early warning system, fraud detection and reporting mechanisms are doing what they were designed to do. The increased scrutiny is likely to raise the regulatory cost for banks and non-banks.

These efficiency tests will also be married to better usage of artificial intelligence and machine learning at RBI, the first of the two people quoted above said. Alongside, the regulator is also increasing its supervisory bench strength by adding a higher count of 500-1,000 new officers every year, the second person said. The RBI has over 13,000 employees currently.

The central bank is also stepping up training for these officers, with workshops being organised every month to better learn the use of AI and ML tools, the second person quoted above said. The RBI is inviting international experts to these sessions to train its officers, the second person said.

As part of the increased supervisory scrutiny, the RBI is also closely reviewing large data dumps from banks and NBFCs. In a recent assessment of a sample of a few banks, the RBI collected data including divergences, provisions, know your customer and anti-money laundering compliance, the first person quoted above said.

The aim of this increased scrutiny is for the RBI to catch vulnerabilities at institutions much before they become serious, both the people quoted above said. This will not only curb any serious non-compliance, but will also avoid systemic issues in the financial system.

The RBI had first announced creation of a separate supervisory cadre in May 2019.

In November 2019, the central bank reorganised its supervisory division to better manage system health. At the time, there were three separate supervisory departments focusing on banks, non-banks and urban cooperative banks. Under the reorganisation plan, the RBI merged these three departments and formed the Department of Supervision. It was tasked with activity-based supervision of regulated entities against the previous approach of focusing on a segment.

The RBI was criticised for its supervisory capabilities after the Nirav Modi scandal broke in 2018. Instances such as the Yes Bank Ltd.'s reconstitution, Lakshmi Vilas Bank merger, Punjab & Maharashtra Cooperative Bank scandal and the insolvencies of Dewan Housing Finance Corp., Reliance Capital Ltd. and Srei Group's non-bank companies have further complicated the regulatory arena.

According to a former RBI deputy governor, who is part of the supervisory training and spoke on the condition of anonymity, the regulator is keen on avoiding any such instances in the future.