Photo: Mint
Photo: Mint

RBI says scope to fine-tune financial conglomerates’ oversight framework

Excessive credit growth, if funded with short-term financing, is not stability-enhancing, says RBI's Shaktikanta Das

Mumbai: The Reserve Bank of India (RBI) on Monday said that while the current financial conglomerate (FC) oversight satisfies all relevant guidelines, there possibly is scope to further fine-tune them to Indian conditions.

A financial conglomerate (FC) is a group of entities whose activities are in the financial sector.

This, RBI said, will help identify relevant FCs, incorporate market-based feedback in FC assessment and have proportionate triggers for timely action.

At present, the oversight of financial conglomerates is being carried out by an inter-regulatory forum for monitoring financial conglomerates (IRF-FC), which is one of four working groups set up under the FSDC sub-committee (FSDC-SC).

RBI governor Shaktikanta Das wrote in the foreword to RBI’s financial stability report (FSR) on Monday that recent developments in non-banking financial companies (NBFCs) have underscored the need for greater prudence in risk-taking.

“There is, in particular, a need for some rebalancing as excessive credit growth, especially if funded with short-term financing, either sectorally or overall, is not stability-enhancing. The framework for oversight of financial conglomerates also requires closer attention," Das wrote.

The central bank explained that, as the Infrastructure Leasing & Financial Services Ltd (IL&FS) incident in the domestic financial markets illustrates, conglomerate structures also pose some clear risks. Intra-group transactions create opportunities for regulatory arbitrage by bypassing regulations related to exposure norms and opportunities to mask leverage through double-gearing and complex inter-group structures. This leads to a possible spillover of risks to the financial system in times of business turmoil, the central bank said.

A series of downgrades of IL&FS papers in September had forced fixed income schemes of mutual funds to take large haircuts on their exposure. In the wake of an uncertain outlook of recovery of their dues, some schemes took the entire haircut, while some took haircuts of as much as 50%. Banks and other financial institutions have a total exposure of around 94,000 crore to IL&FS and its 350 subsidiaries. Of this, nationalised banks have around exposure of 35,000-40,000 crore. Together with private banks, the total exposure of banks is 50,000-60,000 crore.

“Complex and camouflaged inter-group linkages through credit support and potency of spillover effects in times of turmoil (through banking sector linkages) are thus becoming important considerations for identifying FCs in the Indian context," RBI said. It is also important to have an oversight of groups that are engaged in financial intermediation with significant spillover potential and yet have a significant part of their group revenue coming from non-financial businesses, said the central bank.

The Securities and Exchange Board of India (Sebi) has recently overhauled disclosures by credit rating agencies (CRAs). The enhanced disclosures pertain to parent, group, government support, and liquidity position (including forward looking measures for non-banks such as unutilized credit lines and adequacy of cash flows for servicing maturing debt obligation).

“Incorporation of such disclosures in the analysis as also periodic discussions with the rating agencies will significantly enrich the quality of the quarterly analysis," RBI said.