The central board of Reserve Bank of India (RBI) on Tuesday approved creating a specialized supervisory and regulatory structure for commercial banks, urban cooperative banks and non-banking financial companies (NBFCs).

The decision is based on the recommendations of an internal committee under the current executive director in charge of NBFC supervision, Rosemary Sebastian, an official close to the development said on condition of anonymity.

“The board also reviewed the present structure of supervision in RBI in the context of the growing diversity, complexities and interconnectedness within the Indian financial sector. With a view to strengthening the supervision and regulation of commercial banks, urban cooperative banks and non-banking financial companies, the board decided to create a specialized supervisory and regulatory cadre within the RBI," said RBI in a press release.

The decision was taken at the RBI board meeting held in Chennai on Tuesday.

This move to revamp the current structure will involve consolidating the different supervisory and regulatory activities and resources under a separate division, and also hiring external experts for the function. Last year, RBI had advertised for hiring supervisory resources at the assistant general manager level which includes bankers and accountants.

“This is a massive exercise and RBI will start on it immediately. It is yet to be decided who will head this structure as the current deputy governor N.S. Vishwanathan is set to retire in one-and-a-half months," the official cited earlier added.

The central bank is also looking to introduce risk-based supervision for NBFCs and urban cooperative banks, said a second official aware of the matter, also on condition of anonymity.

Currently, banks follow risk-based supervision which focusses on evaluating both present and future risks and facilitates early corrective action. In comparison, supervision of NBFCs and urban cooperative banks is less stringent.

“These departments will be more focussed and will ensure that there are early warning signals which will alert the regulator about an impending crisis," said the second official aware of the matter .

On 16 May, RBI had also asked NBFCs with assets of more than 5,000 crore to appoint chief risk officers (CRO). “With the increasing role of NBFCs in direct credit intermediation, there is a need for NBFCs to augment risk management practices," the central bank had said.

The decision to consolidate the supervisory and regulatory structures within RBI is not new. Before 1991, RBI had a stand-alone department of supervision for all the entities supervised by it. It got separated into different departments following the Harshad Mehta scam, said the second official aware of the matter.

RBI’s move comes in the wake of ongoing rating downgrades of non-banks which has raised fears of another liquidity crisis. Following a series of defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS) last year, mutual funds with exposure to debt papers of the company had to write off a chunk of their holdings. This, and the ensuing defaults by some non-banking financial companies (NBFCs), had led to the liquidity crisis.

“Lately, we have seen that NBFCs’ link to banks has been increasing. Probably, it was felt that due to the close links, it is necessary to merge the supervisory and regulatory structures of NBFCs and banks. However, the need of the hour is to make supervision more granular," said Indira Rajaraman, former RBI board member.

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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