RBI To Boost Share Of Offsite Supervision To 70-75% In 3-5 Years
The RBI has already been stress-testing its offsite supervision activities in real-world situations.
The Reserve Bank of India aims to leverage use of technology to increase the efficiency of its supervisory activities and raise share of offsite supervision of banks and non-bank entities to 70-75% in three to five years, according to a person with knowledge of the matter.
Currently, about 10-15% of supervision is done through back office offsite activity, with almost 85-90% of the supervision driven by on-site inspection of books of banks, non-bank lenders and payment players.
The target is to achieve 70-75% offsite supervision in three to five years, with 25-30% of on-site supervision that will simply validate the offsite supervision activity, the person quoted above said on the condition of anonymity. This supervisory vision will be achieved through a blend of data analytics, artificial intelligence and machine learning, the person said.
The RBI has already been stress-testing its offsite supervision activities in real-world situations, by conducting micro data analysis of five of the largest banks in India. This analysis is then compared to the parallel activities done by the on-site inspection team, with an aim to improve RBI’s offline supervision.
One of the key things to focus on is sanctity of data sharing and uniformity of data received from banks, the person quoted above said.
Technologically, the RBI has the ability to tap directly into the systems of banks, but traditionally relies on data submissions by banks under specified formats. Eventually, the intent is that this data sharing and tracking with RBI will become completely automated and that will give banks less subjectivity in how they present data to the regulator, according to the person quoted above.
On Sept. 29, 2022, the RBI’s Department of Supervision had issued an expression of interest to engage consultants for use of advanced analytics, artificial intelligence and machine learning to generate supervisory inputs. On Nov. 30, 2022, the RBI said that it had shortlisted seven applicants that will now participate in the selection of a final consultant. The seven shortlisted names include Accenture Solutions Pvt., Boston Consulting Group (India) Pvt., Deloitte Touche Tohmatsu India LLP, Ernst and Young LLP, KPMG Assurance and Consulting Services LLP, McKinsey and Co., and Pricewaterhouse Coopers Pvt.
The appointment of a consultant and improvements in regulatory reporting will enable faster and almost real-time supervisory scrutiny, thus reducing risk for the system, the person quoted above said. It will also mean the RBI can come up with solutions faster when it detects stress build-up in an organisation, the person said.
The growing reliance on offsite supervision is a sharp shift in the process, after RBI’s supervisory role and responsibilities were widely questioned over the last few years.
The criticism of the RBI was born from the failure of entities such as Dewan Housing Finance Corp., Infrastructure Leasing and Financial Services, Punjab and Maharashtra Co-Operative Bank, and the stress seen at Lakshmi Vilas Bank and Yes Bank. Incidents, such as gaps in bank data collation that led to Nirav Modi fraud at Punjab National Bank, also spurred the RBI to look at improving its supervision and leverage technology more.
In November 2019, the RBI created a dedicated cadre for the Department of Supervision following these developments, with an aim to create a specialised group within the central bank that can preempt and tackle such issues.
Since then, the RBI has been taking a more aggressive approach to managing problems at stressed entities or entities facing governance issues, by stepping in with an administrator in the case of Srei Group and Reliance Capital. It has also facilitated the restructuring of Yes Bank, merged stressed Lakshmi Vilas Bank into DBS Bank India, and appointed its representatives on boards of banks such as RBL Bank to smoothen governance and management transition.
T Bijoy Idicheriah is a senior financial journalist, who has been writing on the world of banking and central banking for 17 years.
