Tag: Deputy Governor

Banks need to design appropriate governance standards and implement internal controls: Deputy Governor, RBI

Banking & Finance

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Banks, as repositories of public resources, need to design appropriate governance standards and implement internal controls to be worthy of the public trust, according to MK Jain, Deputy Governor, Reserve Bank of India.

“It is also well-acknowledged that shareholders are driven by maximisation of the returns on their capital. But in banks, this objective is realised largely through the resources raised from depositors.

“…Being highly leveraged entities and with their inter-connectedness, there must be separation between ownership and management so that they operate on professional lines,” Jain said at an event organised by a financial daily.

He emphasised that banks enjoy the privilege of mobilising uncollateralised public deposits and operating with high levels of leverage.

“The negative externalities of banks and NBFCs are also much higher than those for any non-financial entity due to their inter-connectedness. That’s why, globally, banks are regulated and supervised very closely,” Jain said.

Tools for proactive off-site and on-site supervision

For continuous engagement with supervised entities (SEs), a web-based and an end-to-end workflow automation system will be launched shortly, the Deputy Governor said.

This has various functionalities including inspection, compliance and incident reporting for cyber security, etc. with a built-in remediation workflow, time tracking, notifications and alerts, Management Information System (MIS) reports and dashboards.

Data capabilities

Jain underscored that the data capabilities of the RBI are in the process of being further upgraded through the revamped data warehouse – the Centralised Information Management System (CIMS). This is in addition to Central Repository of Information on large Credits (CRILC) and Central Fraud Registry (CFR).

The data capabilities will encompass tools and applications for AI-ML, data visualisation and big data analytics.

As part of the forward-looking assessment of stress, the Deputy Governor noted that various supervisory tools have been designed to identify vulnerable borrowers who have less ‘distance to default’ as well as vulnerable banks based on various parameters. Early warning systems and supervisory stress testing have been made an integral part of prudential supervision.

“Many thematic assessments are also being regularly carried out to identify system-wide issues and assess ‘conduct’ practices for taking corrective actions. Data dump analysis is also much more extensively used as part of our transaction testing exercise,” he said.

Jain felt that agile and creative thinking is going to be essential in staying ahead of the digital curve when it comes to the evolution of financial services.

The Deputy Governor said, “Financial institutions would need to experiment with new technologies and tailor their products and services in alignment with business strategy and competitive considerations as well as in compliance with existing laws and regulations.”

“Leveraging on technology will also require enhanced financial investments, building expertise and capacities, proper resource allocation and further strengthening of the operational capabilities.”

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Failure of any large NBFC may translate into a risk to its lenders: RBI Dy Governor M Rajeshwar Rao

Banking & Finance

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The reputation of the non-banking financial sector has been dented in recent times by failure of certain entities due to idiosyncratic factors, said Reserve Bank of India Deputy Governor M Rajeshwar Rao.

The challenge, therefore, is to restore trust in the sector by ensuring that few entities or activities do not generate vulnerabilities which go undetected and create shocks and give rise to systemic risk through their interlinkages with the financial system.

“Forestalling and where necessary, decisively resolving such episodes becomes a key focus of our regulatory and supervisory efforts,”Rao said at the CII NBFC Summit.

There are 9651 NBFCs across twelve different categories focussed on a diverse set of products, customer segments, and geographies.

As on March 31, 2021, the non-banking finance company (NBFC) sector (including housing finance companies/ HFCs) had assets worth more than ₹54 lakh crore, equivalent to about 25 per cent of the asset size of the banking sector.

“Therefore, there can be no doubt regarding its significance and role within the financial system in meeting the credit needs of a large segment of the society,” Rao said.

Over the last five years the NBFC sector assets have grown at cumulative average growth rate of 17.91 per cent.

The Deputy Governor underscored that: “Now, the non-banking sector has grown significantly and several NBFCs match the size of the largest Urban Cooperative Bank or the largest Regional Rural bank.

“In fact, few of them are as big as some of the new generation private sector banks. Further, they have become more and more interconnected with the financial system.”

He said NBFCs are the largest net borrowers of funds from the financial system and banks provide a substantial part of the funding to NBFCs and HFCs.

Therefore, failure of any large NBFC or HFC may translate into a risk to its lenders with the potential to create a contagion.

Failure of any large and deeply interconnected NBFC can also cause disruption to the operations of the small and mid-sized NBFCs through domino effect by limiting their ability to raise funds.

Rao emphasised that liquidity stress in the sector triggered by failure of a large CIC (core investment company) broke the myth that NBFCs do not pose any systemic risk to the financial system.

SBR framework

The Deputy Governor said a scale-based regulatory (SBR) framework, proportionate to the systemic significance of NBFCs, may be optimal approach where the level of regulation and supervision will be a function of the size, activity, and riskiness of NBFCs.

As regulations would be proportional to the scale of NBFCs, it would not impose undue costs on the Regulated Entities (REs).

Rao explained that: “While certain arbitrages that could potentially have adverse impact would be minimised, the fundamental premise of allowing operational flexibility to NBFCs in conducting their business would not be diluted.

“…There has been a consistent and conscious understanding that a “one size fits all” approach is not suitable for NBFC sector, which are a diverse set of financial intermediaries, with different business models, serve heterogenous group of customers and are exposed to different risks.”

The Deputy Governor urged NBFC promoters/ managements to create a culture of responsible governance in their respective organisations where every employee feels responsible towards the customer, organisation, and society.

He felt that good governance is key to long term resilience, efficiency and survival of the entities.

Customer protection

Rao underscored that protecting customers against unfair, deceptive, or fraudulent practices has to become top priority of every entity and permeate the organisation culturally and become a part of its ethos.

“Customer service would mean, amongst many other things, that a customer has similar pre-sale and post-sale experience, she/he is not disadvantaged vis-à-vis another customer because he or she approached the financial entity through a different delivery channel, and he or she has a right to hassle-free exit from the contractual obligation.

“This issue has been deliberated often enough and it’s time to act now,” the Deputy Governor said.

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Reserve Bank working towards phased implementation of digital currencies

Banking & Finance

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The time for introduction of central bank digital currencies (CBDCs) is possibly near, with the Reserve Bank of India (RBI) currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption, according to Deputy Governor T Rabi Sankar.

Referring to countries generally implementing specific purpose CBDCs in the wholesale and retail segments, Sankar observed that going forward, after studying the impact of these models, launch of general purpose CBDCs will be evaluated.

A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.

Some key issues under examination by the RBI relate to the scope of CBDCs – whether they should be used in retail payments or also in wholesale payments; the underlying technology — whether it should be a distributed ledger or a centralised ledger, for instance, and whether the choice of technology should vary according to use cases, the Deputy Governor said.

Further, the validation mechanism — whether token-based or account-based distribution architecture — whether direct issuance by the RBI or through banks; degree of anonymity etc., are also being examined.

However, conducting pilots in wholesale and retail segments may be a possibility in near future.

Benefits and risks

At a webinar organised by New Delhi-based Vidhi Centre for Legal Policy, Sankar emphasised that introduction of CBDC has the potential to provide significant benefits such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk.

“Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option,” he said.

The Deputy Governor cautioned that there are associated risks, no doubt, but they need to be carefully evaluated against the potential benefits.

He underscored that it would be the RBI’s endeavour, as we move forward in the direction of India’s CBDC, to take the necessary steps which would reiterate the leadership position of India in payment systems.”

Sankar said CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies that have mushroomed over the last decade.

“Private virtual currencies sit at substantial odds to the historical concept of money. They are not commodities or claims on commodities as they have no intrinsic value; some claims that they are akin to gold clearly seem opportunistic.

“Usually, certainly for the most popular ones now, they do not represent any person’s debt or liabilities. There is no ISSUER. They are not money (certainly not CURRENCY) as the word has come to be understood historically,” he cautioned.

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RBI Dy Governor Mahesh Jain gets two-year extension

Banking & Finance

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The Appointments Committee of the Cabinet on Tuesday approved the re-appointment of Mahesh Kumar Jain, Deputy Governor, Reserve Bank of India (RBI), for two years with effect from June 22.

It may be recalled that Jain’s three-year term as RBI Deputy Governor is due to get completed on June 21.

With the re-appointment of Jain, the Centre has stuck to the tradition of having a commercial banker occupy the post of RBI Deputy Governor (reserved for bankers). As a result, the central bank now has four serving RBI Deputy Governors. The other three serving deputy governors are Michael Patra, M Rajeshwar Rao and Rabi Sankar.

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