Reserve Bank To Strengthen Risk-Based Supervision Of Banks And NBFCs

by mehekkaoberoi

Background:-

  • Stability of the financial system has become the central challenge to bank regulators and supervisors throughout the world. The Reserve Bank has decided to review and strengthen the Risk Based Supervision (RBS) of the banking sector with a view to enable financial sector players to address the emerging challenges.
  • The RBS process essentially involves continuous monitoring and evaluation of the risk profiles of the supervised institutions in relation to their business strategy and exposures.
  • The RBI has directed to select the NBFCs and UCBs  to implement this system.
  • The approach is expected to optimize utilisation of supervisory resources and minimize the impact of crisis situation in the financial system.

Linkages:-

Current Situation:-

  • There are rapid developments in the last few years, which has led to significant increase in the size of the NBFCs sector. Therefore, there is need to review the regulatory framework in the line with the changing risk profile of NBFCs and UCBs.
  • The RBI conducts the supervision of the banks through offsite monitoring of the banks and an annual inspection of the banks, where applicable.
  • The supervision process is based on CAMELS approach where capital adequacy, asset quality, management aspects, earnings, liquidity and systems and control are examined keeping in view the requirements of Section 22 of the Banking Regulation Act, 1949. 
  • In recent times, NBFCs and UCBs have grown in size and have become systemically important in the economy by giving their increased participation in the financial credit market.

Impact:-

  • The impact on the supervisory is to ensure that banks must take corrective action to reduce significant risks.
  • By undertaking this supervision, RBI would be assessing the financial soundness, asset quality, government framework and liquidity of NBFCs and UCBs, to protect the interest of depositors.
  • The RBI regulation and supervision will be achieved so that the NBFC sector will become financially strong.
  • RBI qualitative measures will help ensure liquidity in the NBFC sector, which will help them to bring uniformity with bank borrowers and will also help them to expand their business.
  • It not only brings Business for the NBFCs and UCBs but also helps other businesses y improving the liquidity conditions in the market.

Important Concepts:-

RBS model: It is a comprehensive, formally structured system that assesses risks within the financial system, giving priority to the resolution of those risks.

NBFC: – A non-banking financial company, also known as non-banking financial institutions, are companies that offer financial services and products but are not officially recognized as a bank with a full banking license. Generally, the distinction between a recognized bank and a non-banking financial company is the fact that non-bank companies cannot accept traditional demand deposits. Demand deposits are funds held in a bank account that can be withdrawn at any time, usually in the form of a checking account.

UCBs: – The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centered around communities, localities work place groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.

Content Contribution by – Vaishnavi Dahivalikar

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