Tag: nbfcs

Indian Bank inks MoU with NBFCs for priority sector lending

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Indian Bank on Friday announced that it has entered into a memorandum of understanding with three leading non-banking finance companies (NBFCs) and housing finance companies (HFCs) for co-originate loans to the priority sectors.

The Chennai-based lender is partnering with Indiabulls Housing Finance, Indiabulls Commercial Credit and IIFL Home Finance on this co-lending arrangement.

In November 2020, the RBI had issued ‘Co-Lending Model’ guidelines allowing banks to co-lend with all registered NBFCs (including HFCs) to priority sector lending with an aim to improve the flow of credit to unserved and underserved sectors and make funds available to borrowers at an affordable cost.

“The arrangement entails joint contribution of credit at the facility level, by both lenders. It also involves sharing of risks and rewards between the bank and the NBFC for ensuring appropriate alignment of respective business objectives, as per the mutually decided agreement between the bank and the NBFCs,” Indian Bank said in a press release.

The bank expects to generate substantial business under the priority sector through co-Lending during the third quarter of the current fiscal.

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RBI revamps loan transfer and securtisation rules, BFSI News, ET BFSI

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The Reserve Bank has issued Master Direction on loan transfer, requiring banks and other lending institutions to have a comprehensive board-approved policy for such transactions.

Loan transfers are resorted to by lending institutions for various reasons, ranging from liquidity management, rebalancing their exposures or strategic sales. Also, a robust secondary market in loans will help in creating additional avenues for raising liquidity, the RBI said.

The provisions of the direction are applicable to banks, all non-banking finance companies (NBFCs), including housing finance companies (HFCs), NABARD, NHB, EXIM Bank, and SIDBI.

Minimum holding period

The Master Direction has also prescribed a minimum holding period for different categories of loans after which they shall become eligible for transfer.

“The lenders must put in place a comprehensive Board approved policy for transfer and acquisition of loan exposures under these guidelines.

“These guidelines must…lay down the minimum quantitative and qualitative standards relating to due diligence, valuation, requisite IT systems for capture, storage and management of data, risk management, periodic Board level oversight, etc,” said the Master Direction.

Draft guidelines on Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021, were released for public comments in June last year.

The final direction has been prepared to take into account inter alia the comments received. The direction, the RBI said came into effect immediately.

As per the direction, “a loan transfer should result in immediate separation of the transferor from the risks and rewards associated with loans to the extent that the economic interest has been transferred”.

In case of any retained economic interest in the exposure by the transferor, the loan transfer agreement should specify the distribution of the principal and interest income from the transferred loan between the transferor and the transferee(s), it added.

‘Transferor’ means the entity which transfers the economic interest in a loan exposure, while ‘transferee’ refers to the entity to which the economic interest in a loan exposure is transferred.

It further said a transferor “cannot re-acquire” a loan exposure, either fully or partially, that had been transferred by the entity previously, except as a part of a resolution plan.

Further, “the transferee(s) should have the unfettered right to transfer or otherwise dispose of the loans free of any restraining condition to the extent of economic interest transferred to them”.

Loans not in default

The master direction also provides a procedure for the transfer of loans that are not in default.

Meanwhile, the RBI also issued Master Direction on the securitisation of standard assets to facilitate their repackaging into tradable securities with different risk profiles.

Observing that complicated and opaque securitisation structures could be undesirable from the point of view of financial stability, the RBI said, “Prudentially structured securitisation transactions can be an important facilitator in a well-functioning financial market in that it improves risk distribution and liquidity of lenders in originating fresh loan exposures”.

In its ‘Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021’, the central bank has specified the Minimum Retention Requirement (MRR) for different classes of assets.

For underlying loans with an original maturity of 24 months or less, the MRR shall be 5 per cent of the book value of the loans being securitised. It will be 10 per cent for loans with an original maturity of more than 24 months.

In the case of residential mortgage-backed securities, the MRR for the originator shall be 5 per cent of the book value of the loans being securitised, irrespective of the original maturity.



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Infrastructure NBFCs: On stable footing amidst a crisis

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Summing up, the future of NBFC-IFCs is promising despite concerns.

By Manushree Saggar & Deep Singh

Infrastructure finance non-bank companies (NBFC-IFCs) have remained largely resilient to the Covid-19 crisis. While growth of NBFC-IFCs moderated over the last two years, the asset quality indicators have improved and, with a higher provision coverage (64% as of March 31, 2021, the strongest level since March 2016), their solvency too has improved. Moderate growth and healthy internal accruals have led to a decline in leverage, giving the entities further headroom for growth in the medium term. Improved systemic liquidity and consequent softening of cost of borrowings has also supported the earnings profile. Thus, the outlook for the sector is ‘Stable’ despite a challenging operating environment.

With infra credit penetration to GDP estimated at 10.9% as of March 31, 2021 compared to 12.4% in 2015 and 10-year average of ~11.4%, the growth potential is encouraging. This growth will be well supported by the government of India’s investment target of Rs 111 lakh crore under the National Infrastructure Pipeline (NIP) till 2025. A stronger NBFC-IFC balance sheet therefore will enable them to be a partner in this evolving growth story. At the same time, timely resolution of existing stressed assets would be critical for sustained improvement in the credit profile of these entities.

As for recent trends for NBFC-IFCs, their portfolio growth was flat in Q1FY2022, after improving in H2FY2021. In FY2021, while IFCs reported healthy credit growth of 16%, banks reported just 4% growth; the former were also helped by the Centre’s liquidity package for discoms, besides continued growth in IRFCs assets under management. Consequently, IFCs’ share in total infrastructure credit increased to 54% as of March 31, 2021 (from 39% five years ago) vis-a vis banks’ share of 46%.

Going forward, as resolution/recoveries gather pace, the improvement in asset quality indicators is expected to continue. The reported stage 3% for these entities declined to 4.1% as of March 31, 2021 (peak level of 7.3% on March 31, 2018) and remained stable at the end of Q1FY22. However, stage 2%, which is driven by state sector customers, was volatile and at elevated levels even as incremental slippages were controlled. As of March 31, 2021, the proportion of IFC portfolio restructuring was less than 1%; and the impact of the second wave has been negligible. This, coupled with further resolution of pending stressed assets in the near term, could lead to a further improvement in IFCs’ asset quality indicators.

In terms of portfolio vulnerability, solar and wind projects backed by relatively weaker credit promoter group and higher exposure to state discoms with extended receivable cycles, remain a monitorable. Also, NBFC-IFCs continue to face high concentration risks, thereby making them prone to lumpy slippages.

The ALM profile of IFCs, which was characterised by sizeable cumulative negative mismatches in the up to one-year buckets, improved in recent quarters, with long-term funds replacing short-term borrowings, supported by favourable systemic rates and higher on-balance sheet liquidity. However, the trend may not continue over the longer term. Hence, the liquidity profile of these entities is expected to remain dependent on their refinancing ability. Significantly, most IFCs maintain adequate sanctioned but undrawn bank lines to plug the ALM mismatches and enjoy healthy financial flexibility given their strong parentage.

With favourable borrowing cost trajectory and steady decline in non-performing loans, Public-IFCs achieved better RoA of 1.8% in FY2021 (six-year average 1.7%); however, the profitability of Private-IFCs remains considerably lower with a sub-par RoA of 1.19% (five-year average 1.21%).

Summing up, the future of NBFC-IFCs is promising despite concerns.

Manushree Saggar is Vice President & Sector Head and Deep Singh is Vice President, ICRA

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Sanjay Wadhwa joins as CFO of IIFL Wealth and Asset Management, BFSI News, ET BFSI

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IIFL Wealth and Asset Management has announced the appointment of Sanjay Wadhwa as the Chief Financial Officer (CFO) with effect from September 02, 2021.

Sanjay Wadhwa joins IIFL Wealth and Asset Management from L&T Financial Services, where he held the position of Group Financial Controller and was responsible for the finance control function of all the group entities, including CIC, NBFCs, and AMC.

Sanjay Wadhwa, CFO, IIFL Wealth and Asset Management, said, “The growth of IIFL Wealth and Asset Management has been incredible. I am privileged to have the opportunity to drive IIFL WAM’s growth, financial strategy and performance by being part of this dynamic team.”

Wadhwa brings a wealth of expertise in Finance across varied industries viz. Financial Services (Wealth Management, Asset Management, NBFC, Insurance Broking, Stock Broking, Commodity Exchange, Clearing Corporation, Commodity Broking), Manufacturing, Consulting and Audit.

Sanjay’s overall experience of 24 years and his judicious industry knowledge comes with an established track record of streamlining business and finance operations.

In addition to his proficiency in developing and implementing financial and process controls, he has strong skills in initiating and fostering strategic tie-ups, managing large treasury operations and M&A integration.

Karan Bhagat, Founder, MD & CEO, IIFL Wealth and Asset Management, said, “We are delighted to have Sanjay join IIFL Wealth and Asset Management as our CFO. His rich experience and depth of knowledge will add immense value as we maintain our sharp focus on growth, profitability and capital efficiency. I would also like to express our deep gratitude to Mihir Nanavati for his contribution as a CFO”.



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Icra survey, BFSI News, ET BFSI

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Around 42 per cent of non-banking financial companies (NBFCs) expect a growth of more than 15 per cent in their asset under management (AUM) in fiscal 2021-22, says an Icra Ratings survey. The findings are based on a survey of 65 non-banks, constituting around 60 per cent of the industry AUM.

The agency conducted the survey to understand the impact of the second wave of COVID-19 on these entities and their expectations going forward.

It said NBFCs growth expectations have moderated vis-a-vis the expectations six months earlier. This follows the possible impact of Covid 2.0 on business in Q1 FY2022.

“While 42 per cent of the issuers (NBFCs by number) are expecting a more than 15 per cent growth in AUM in FY2022, the proportion based on AUM weights is much lower at 8 per cent, indicating that larger players in the segment expect a relatively moderate growth in FY2022,” the agency’s Vice President (Financial Sector Ratings) Manushree Saggar said.

With most of the lenders (74 per cent in AUM terms) indicating an up to 10 per cent AUM growth, the agency expects the growth for the overall industry to be about 7-9 per cent for FY2022.

Within the non-bank finance sector, segments like MFIs, SME-focussed NBFCs and affordable housing finance would continue to record much higher growth than the overall industry averages, supported by good demand and lower base, she said.

The survey said with gradual easing of lockdowns and moderation in fresh cases of Covid and with increased vaccination coverage, the lenders are optimistic on growth pick-up in balance part of FY2022 and expect it to be higher than the growth seen in FY2021.

However, the non-bank finance companies are expecting the asset quality related pain to persist in the current fiscal as well, it showed.

“Overall, 87 per cent of issuers (by AUM) expect reported gross stage 3/ NPAs to be either same or higher than March 2021 levels, which in turn will keep the credit costs elevated,” it said.

Over 90 per cent of lenders (by AUM) expects the credit costs to remain stable or increase further over FY2021 levels.

On the restructuring front, while lenders are expecting marginally higher numbers as compared to the last fiscal, the overall numbers are expected to be low, the agency said.

Saggar said with no blanket moratorium and reflecting the stress on the cash flows of the underlying borrowers, mid-sized lenders (AUM between Rs 5,000-Rs 20,000 crore) are expecting a higher share of restructuring under Restructuring 2.0.

“Overall, the restructured book of non-bank finance entities is expected to double to 3.1-3.3 per cent in March 2022 from 1.6 per cent in March 2021,” Saggar added.

The agency said a significantly higher number of issuers (56 per cent) are expecting to raise capital in FY2022 as compared to the earlier survey, wherein only 28 per cent of the issuers were expected capital raise in FY2022.

It expects the pre-tax profitability for non-bank finance companies in FY2022 would remain similar to the last fiscal which was around 30 per cent lower than the pre-Covid levels.



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RBI warns of stress build-up in consumer credit, BFSI News, ET BFSI

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The pandemic and its fallout on the economy has made consumer lending riskier for banks even as it has been the only sector to help banks keep their loan books afloat at such times.

The delinquency rates for such loans are going up particularly for private sector banks and NBFCs during the pandemic warned the Reserve Bank of India‘s latest financial stability report. At the same time the second wave has also affected demand for such loans with a steep fall in demand in April , it said.

The Reserve Bank’s latest Financial Stability Report notes that the delinquency rates for consumer credit in private sector banks doubled from 1.2 per cent in January 2020 to 2.4 per cent in January 2021. While for NBFCs it went up from 5.3 per cent to 6.7 per cent in the same period. Overall consumer credit deteriorated after the loan moratorium programme came to an end in September 2020.

“While banks and other financial institutions have resilient capital and liquidity buffers, and balance sheet stress remains moderate in spite of the pandemic, close monitoring of MSME and retail credit portfolios is warranted.” the report said.

Consumer credit includes home loans, loans against property, auto loans, two-wheeler loans, commercial vehicle loans, construction equipment loans, personal loans, credit cards, business loans, consumer durable loans, education loans and gold loans.

The overall demand for consumer credit in terms of inquiries had stabilised in Q4’2020-21 after a sharp rebound during the festive season in Q3’2020-21 after the first COVID-19 wave receded. But the second wave, however, has sharply affected credit demand, with a steep fall in inquiries across product categories in April 2021. Growth in credit-active consumers- consumers with at least one outstanding credit account- and, outstanding balances, however, remains sluggish compared to the previous comparable period. For unsecured loans, the fastest-growing category in this segment, for example, fell from 39.4 per cent in January’20 to 6.5 per cent in FY’21. For home, which accounts for a major chunk of this segment, the growth rate of credit-active consumers slowed from 12.03 per cent to 0.3 per cent during the period.

On a positive note, loan inquiries are more from better-rated borrowers. “Loan approval rates remain healthy as the risk tier composition of inquiries shows a distinct tilt towards better-rated customers.” the central bank‘s report said.



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RBI may give banks/NBFCs more time to appoint auditors

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The Reserve Bank of India may give more time to regulated entities, including banks, to implement the new guidelines on the appointment of statutory auditors.

Regulated entities are of the view that a year’s time should have been given for implementing the guidelines as some of them have already re-appointed auditors for FY22. The RBI’s new norms were unveiled on April 27. The guidelines allow regulated entities to appoint auditors for three years. What this means is that audit firms that have already completed the three-year period will have to discontinue their assignment.

Financial services industry veteran TT Srinivasaraghavan observed that some of the regulated entities have already had their AGMs in which appointment of Statutory Auditors is usually on the agenda. So, industry bodies want some more time (say, from April 1, 2022) for implementation of the guidelines.

“In the meantime, an advisory/ consultative group of key stakeholders — the RBI, the regulated entities, and the CA Institute — can be asked to assess the guidelines and give recommendations within two months… there will be a 360-degree view on the issues and the potential solutions,” Srinivasaraghavan suggested.

Applicable to banks

The guidelines are applicable to commercial banks (excluding Regional Rural Banks), urban co-operative banks and non-banking finance companies (NBFCs), including housing finance companies, from financial year 2021-22. However, non-deposit taking NBFCs with asset size below ₹1,000 crore can continue with their extant procedure.

Chartered Accountant Sethuratham Ravi said regulated entities can ask for a dispensation, seeking continuation of the current auditor for one more quarter. “A regulated entity can write to the RBI that it is in the process of appointing a new auditor and that the same needs to be ratified at the AGM… The RBI could have given one more year for implementation,” Ravi said.

P Sitaram, ED & CFO, IDBI Bank, said the guidelines came at a time when some banks would have proceeded with the appointment/re-appointment of auditors. “So, they should have done it (issued the guidelines) either in January or having issued it, they could have said the guidelines will be applicable from next year,” he said.

Banking expert V Viswanathan underscored that even if an audit firm has completed its three-year term, the status quo of March quarter will continue for the April-June quarter. The bank will apply for RBI approval, and it is given.

“Sometimes, public sector banks get the list (of eligible audit firms from RBI) after September also. In which case, the status quo continues for the second quarter also,” he said.

 

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Shailesh Haribhakti, BFSI News, ET BFSI

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By Shailesh Haribhakti

Due to the new circular it is most likely that many large audit firms will be ineligible for appointment as auditors of large banks & NBFCs which could potentially impact:

o Confidence of International investors – debt and equity, affecting capital flows

o Fresh international capital raising and meeting with norms for regulatory capital on an ongoing basis – potential international investors may not recognize the brand of smaller Indian audit firms and such firms may not be familiar with international regulations. The value of assurance may suffer.

o ESG Ranking/ Rating – while environment is an important driver, governance is an equally important driver in the ESG ratings / rankings of companies, and the choice of auditors could have an impact!

o Audit Quality due to inability to engage larger firms with both depth of sectoral expertise as well as greater understanding and access to international accounting norms & trends at a time when international standards (IFRS convergence) implementation involving complex and dynamic modelling for loss provisioning is still in progress for financial services entities in India.

RBI's new rules for auditors could impact audit quality: Shailesh HaribhaktiCorporate Groups and Auditors Appointment

Corporate groups having a Bank/ NBFC (including Core Investment Companies or CIC) within their fold whether as a holding company or otherwise, cannot appoint one Audit Firm or one set of firms acting as auditors’/ joint auditors for the whole group.They need to consider separate auditors/ set of auditors for the Bank, NBFC(s) and other entities of the group.This could potentially impact:

o Audit Risk & Quality – The auditor of the Holdco (being a Bank or a CIC) will be required to audit its consolidated financial statements without auditing any of the underlying entities.This is against both the international, as well as SEBI’s efforts to get holding company auditors to take responsibility for the consolidated group as a whole

o ‘Ease of doing business’ – Bank/ NBFCs in large groups will have to change auditors every 3 years, whereas the operating companies forming part of the group will have an auditor with a different tenure.

With large groups using many of the large Audit Firms (who are not their auditors) for various other services across the group, none of these Firms would be eligible to be appointed as auditors of the CIC due to the independence restrictions that apply across the group.This could lead to a significant lack of choice in appointing firms that otherwise have the capacity and capability to audit the financial statements of holding companies.Shailesh Haribhakti, veteran auditor

Auditor Rotation and Joint Audits

• Combination of auditors’ term of 3 years, cooling period of 6 years, requirement for Joint Audit & maximum limit of Banks/ NBFCs an Audit Firm can concurrently audit, could potentially impact:

o Audit Quality – auditors’ of an Entity at any point of time would have relatively low vintage, which likely impacts comprehensive understanding of nuances and complexities of issues

o ‘Ease of doing business’ objective – disruptions arising from need to appoint multiple audit firms within a group and time to be spent every 3 years by senior managements, Audit Committees and Boards on a significantly more complex auditor selection process and implementation during an aggravating pandemic time with virtually no transition time and minimal enhancement in Audit Quality etc.

o ‘Capacity’ issues – at least in the short to the medium term with a number of Audit Firms being ineligible for audit of many Banks/ NBFCs, and a requirement of joint audit in place of a single auditor for large Entities

RBI's new rules for auditors could impact audit quality: Shailesh HaribhaktiRequirement for Joint Audit could potentially impact:

o Audit Quality – due to risk of key issues ‘falling through the cracks’ arising from inappropriate division of work and responsibilities in the case of entities implementing joint audit for the first time

Sector specialization and expertise and related impact on audit quality: The financial services sector is highly regulated and very specialized, thereby requiring significant investment of time and effort in building knowledge and deep sectoral expertise and related capacity building.

o Short tenures on audits of Financial Service entities together with a cap on audits, will disincentivize firms from investing in building capabilities in this important sector

o Short tenure on the audits, also doesn’t allow auditors adequate time to fully understand the company and its business complexities, which generally takes 2-3 years

o The independence rules, essentially will make most large firms (that currently have the sectoral depth and capacity) ineligible to be auditors of large banks and NBFCs

• Overall ‘Not a progressive step’ – due to introduction of rules that are not in line with international practices, create significant hardship with no appreciable incremental benefit eg. enhanced Audit Quality

• Choice of auditors – having a cap on the number of audits also will leave new and emerging companies, including the fintech companies (many of whom have NBFC licenses) to be able to appoint a large firm as an auditor.

RBI's new rules for auditors could impact audit quality: Shailesh HaribhaktiRecommendations

• Deferral of the Circular for implementation by two years i.e. from 2023-24

• Increase maximum term of auditor to 5 years (from 3 years) and reduce cooling period to 5 years (from 6 years) which aligns with requirements under the Companies Act & guidelines of IRDA

• Coverage of only large entities eg. asset size over Rs. 15,000 Crores instead of those over Rs. 1,000 Cr.

• Alternative to 2, combine deferral as per ‘1’ above, apply only to entities with asset size > Rs. 10,000 Crores (instead of Rs. 1,000 Crores) with a phased roll out:

• I Phase: only the banks with asset size more than 15,000 crores – from 2023-24

• II Phase: Banks with asset size more than 10,000 crores – from 2024-25

• III Phase: NBFCs with asset size more than 15,000 crores. – from 2025-26

• IV Phase: NBFCs with asset size more than 15,000 crores. – from 2026-27

• At the least, consider exclusion from applicability for entities with no public funds (no borrowings from public/ banks/ FIs) including Core Investment Companies (CICs) not requiring registration with RBI

• Amend the following with regard to restriction on services to Entities & group for a period of 1 year before & after appointment as auditors:

Do away with restriction on providing non-audit services to Entity & group entities and audit services to group entities for a period of one year prior to & one year after appointment as auditors of the Entity – this is not in accordance with existing Indian or international frameworks.Shailesh Haribhakti, audit veteran.

• Align restriction on type of services to Entity & group during the term as auditors in accordance existing frameworks i.e. Companies Act & ICAI Code of Ethics

• Align definition of group entities with existing framework and exclude entities such as those which do not meet the substantive criteria of group entities such as ‘common brand name’, investment of over 20% in entities with no ability to influence etc.

• Do away with mandatory requirement for Joint Audit for entities with asset size > Rs. 15,000 Crores

• Apply restriction of maximum 8 NBFCs per Audit Firm to those with asset size > 10,000 Crores.In case Circular continues to be applicable for NBFCs with asset size > Rs. 1,000 Crores, consider increasing the limit to 12 NBFCs

• Do away with requirement to factor in ‘large exposure’ as part of auditor independence as no such considerations apply internationally and no guidance provided by RBI.

Conclusion

In sum, strengthen independence, technology usage and objectivity. Engender trust in the attest function through a rating based on inspection outcomes. This will strengthen the financial system.

ALSO READ: RBI’s new rules for auditors could pose many challenges: Vishesh Chandiok

ALSO READ: RBI’s new audit norms a shot in the arm for Indian firms

ALSO READ: Big Four’s business seen hit after RBI strengthens audit independence

ALSO READ: Why the new RBI guidelines on auditors need a review?

About the Author: Shailesh Haribhakti, an eminent chartered accountant, has considerable experience in audit, tax and consulting. He is the Chairman of New Haribhakti Business Services LLP and Mentorcap Management Pvt.Ltd.

Disclaimer: The views expressed are solely of the authors and ETCFO.com does not necessarily subscribe to it. ETCFO.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.



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Lockdown impact on NBFCs’ asset quality to be evident gradually: RBI

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As Non-Banking Financial Companies (NBFCs) have continued to disburse credit despite the pandemic, the impact of the lockdown will be evident on their asset quality gradually, said an article in the RBI’s monthly bulletin.

“NBFCs continued to disburse credit despite disruptions caused by the pandemic, albeit at a slower pace,” said the article titled ‘Performance of NBFCs during the Pandemic: A Snapshot’.

Credit performance

Incremental credit flows (on year-on-year basis) to the retail sector continued to increase in the second and third quarter of 2020-21, but at a slower pace, while services sector saw marginal increase in the third quarter last fiscal, wherein vehicle loans, gold loans, transport and tourism were the beneficial segments.

However, incremental credit to industries declined in the same period as the sector is yet to shake off the impact of the pandemic, it further noted.

“Agriculture was the bright spot with the highest growth in disbursements in the third quarter of 2020-21, however, it could be partly attributable to a favourable base effect,” the article said.

Significantly, the share of industry in the sectoral deployment of credit by NBFCs was at 61.6 per cent as on December 2020 compared to 67.4 per cent in December 2019. The share of retail loans increased to 24.5 per cent as on December 2020 from 21 per cent a year ago.

“Asset quality of NBFCs witnessed improvement in 2020-21 so far, compared to the fourth quarter of 2019-20, due to regulatory forbearance,” it said.

However, Gross Non-Performing Asset (GNPA) ratio of NBFCs was elevated in the first and second quarter of 2020-21 compared to the corresponding period in 2019-20 but in the third quarter of 2020-21, both GNPA and NNPA ratios fell compared to the third quarter of 2019-20.

“Nevertheless, the true extent of NPAs in the sector may be gauged in the upcoming quarters as the interim order by the Supreme Court on asset classification standstill was lifted in March 2021,” the article further said. Among sectors, industry witnessed sequential reduction in their GNPA ratio while GNPA ratio of retail loans remained low compared to other sectors.

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RBI to strengthen risk-based supervision of banks, NBFCs, BFSI News, ET BFSI

Banking & Finance

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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 RBI uses the RBS model, including both qualitative and quantitative elements, to supervise banks, urban cooperatives banks, non-banking financial companies and all India financial institutions.

“It is now intended to review the supervisory processes and mechanism in order to make the extant RBS model more robust and capable of addressing emerging challenges, while removing inconsistencies, if any,” the RBI said while inviting bids from technical experts/consultants to carry forward the process for banks.

In case of UCBs and NBFCs, the Expression of Interest (EOI) for ‘Consultant for Review of Supervisory Models’ said the supervisory functions pertaining to commercial banks, UCBs and NBFCs are now integrated, with the objective of harmonising the supervisory approach based on the activities/size of the supervised entities (SEs).

“It is intended to review the existing supervisory rating models under CAMELS approach for improved risk capture in forward looking manner and for harmonising the supervisory approach across all SEs,” it said.

Annual financial inspection of UCBs and NBFCs is largely based on CAMELS model (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Systems & Control).

The RBI undertakes supervision of SEs with the objective of assessing their financial soundness, solvency, asset quality, governance framework, liquidity, and operational viability, so as to protect depositors’ interests and financial stability.

The Reserve Bank conducts supervision of the banks through offsite monitoring of the banks and an annual inspection of the banks, where applicable.

In case of Urban Cooperative Banks (UCBs) and NBFCs, it conducts the supervision through a mix offsite monitoring and on-site inspection, where applicable.

A technical advisory group consisting of senior officers of the RBI would examine the documents submitted by the applicants in connection with EOI.

EOI said the consultant would be required to work in close co-ordination with officers of RBI’s Department of Supervision in Mumbai.



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